Fortescue Metals, the world’s fourth-largest iron ore producer and a common holding in client’s portfolios.
Holding within the ASX Blue Chip portfolio, Fortescue Metals Group (FMG) has reported a 3% rise in its full-year profit, bringing net income to $5.68 billion.
While this marks a positive gain for the fourth-largest iron ore producer, it fell short of analyst expectations, which forecasted a profit of $6.12 billion. The company announced a final dividend of 89 cents per share, at a 70% payout ratio above the targeted range of 50-80% reflecting its commitment to returning value to shareholders despite a challenging year. Investors are welcoming this with shares up 1.5% this morning compared to a -0.33% fall for the ASX200.
The past year has been particularly tumultuous for FMG, characterized by internal and external challenges. The company faced headwinds from a slowdown in Chinese demand for iron ore, as China’s economy, particularly its property sector, continues to experience sluggish growth. This has cast a shadow over future iron ore prices, with peers like BHP also signalling concerns about the sector’s outlook.
Internally, FMG has undergone significant changes, most notably in its green hydrogen ambitions. Chairman Andrew Forrest, who has been a driving force behind the company’s pivot toward green energy, was compelled to scale back the ambitious plan to produce 15 million tons of green hydrogen annually by 2030. High electricity costs have delayed these projects, resulting in FMG laying off around 700 employees as part of its strategic reassessment. Despite these setbacks, Forrest reaffirmed the company’s commitment to achieving net zero emissions by 2030 and highlighted ongoing developments in four global green hydrogen projects located in the US, Australia, Norway, and Brazil.
Operationally, FMG faced difficulties in its Pilbara iron ore projects, including a train derailment and adverse weather conditions that hampered shipments. The company shipped a total of 191.6 million tons of iron ore during the year, a solid performance under the circumstances. However, these disruptions, coupled with inflationary pressures and rising labor costs, led to a 4% increase in the C1 cost per wet metric tonne to $18.24.
On a financial level, FMG’s underlying EBITDA rose by 7.5% to $10.71 billion, maintaining a stable margin of 59%. Revenue also saw an 8% year-on-year increase to $18.22 billion, although it still came in slightly below market expectations. Free cash flow for the period was robust, reaching $5.11 billion, an 18% increase year-on-year. The company’s net debt was reduced significantly by 52% to $497 million, underscoring its strong cash generation and focus on debt reduction.
Looking forward, FMG continues to project iron ore shipments between 190 million to 200 million tons for the next year. It has also maintained its capital expenditure forecast for its Metals business at $3.2 billion to $3.8 billion, alongside energy-related investments. However, with China’s economic slowdown likely to continue weighing on iron ore prices, FMG may face further challenges in maintaining its financial performance in the coming years.
As a reminder, FMG’s inclusion in the ASX Blue Chip portfolio is based on dividend yield, which at 14.5% including franking credits is one of the highest among large-cap stocks and therefore likely to remain in the portfolio for some time.
