Here’s a quick roundup of the broker takes on FMG after the Q3 production report. Morgan Stanley recommends “overweight” and says:
Quick Comment – A shortfall of tonnes in 1Q should not impact the full year target, and does not change the over-arching investment thematic. We remain focused on the capacity to pay down debt early whilst also lifting the dividend. Any short-term equity weakness can be viewed as an opportunity to accumulate the stock. Volume shortfall not indicative of ongoing issues: Ore mined, 34.9Mt, was consistent with 4Q FY13, and ahead of 115Mtpa name plate. Ore shipped, 25Mt, was ~10% below MSe, due to short-term events including a fatality investigation and two separate conveyor belt failures. Production guidance of 127-133Mt was maintained – our slightly conservative estimate remains 123Mt.
1Q had good unit costs despite volumes: Despite a few million tonnes of missed sales, unit costs were US$33/t FOB vs US$36/t in June qtr. The weaker AUD contributed $2/t, the rest was operational. Costs in 2Q/3Q are guided to be higher than FY14 guidance of US$36/t due to the Kings mine ramp up and the cyclone season. We continue to apply US$39/t for FY14.
200% operating Margins the reminder: Realised prices were US$121/t CFR dry, adjusted for freight and moisture, this is about US$100/t, giving operating margins of ~65%. Coupled with sales volumes that rise 50% over the next six months, this is the ‘leverage’ we continue to favour; it drives the sub 4x EV/EBITDA in FY15.
What happens next? Once 155Mtpa is delivered, FMG goes ‘ex-growth’ so we note with interest the ‘Western Hub’ is being referenced again. But with debt to pay down, and extra rail capacity (and maybe port capacity) needed, this is a longer dated option. We remain unconvinced the Iron Bridge JV magnetite project will prove compelling, but FMG is free-carried through Stage 1 and it is only a minor fraction of our valuation (plus US$500mn was paid upfront for port access).
Deutsche is “neutral” and reckons:
- FMG shipped 25.9Mt during SQ 13, including 1.2Mt of third party ore. Total shipments were up 4% q/q, however this was 11% below UBSe. Production and shipments were weaker than expected as a result of the two belt failures at Firetail and Cloudbreak, the tie-ins associated with the wet front end at Cloudbreak, and the fatality at the Cloudbreak OPF in August which, when combined, contributed to 2Mt of lost production. FY 14 shipping guidance of 127-133Mt is maintained.
- Unit costs improve in Q1 but >US$36/t expected in DQ13 and MQ14 C1 unit cash costs were US$33.17/wmt for SQ 13, down 8% q/q, and in line with our estimate of US$33/t. The lower unit costs were due to lower strip ratios, cost reductions and a weaker A$. FMG expects costs in DQ 13 and MQ 14 to be above US$36/t given Kings ramp up and possible wet weather disruptions. Our DQ 13 cost estimate rises to ~US$40/t and thus accounts for today’s guidance. FMG’s realised price improved to US$121/dmt cfr (UBSe US$118/dmt). The difference arises from penalties for impurities of 2.5-3% compared to our est. of 5%.
- Earnings unchanged after updating for SQ 13 While the SQ report was slightly below expectations in terms of production and sales, we have made no changes to our sales estimate of 125Mt for FY 14 as we are already slightly below guidance of 127-133Mt and thus earnings are unchanged.
- Valuation: A$5.57ps (DCF, 10% d.r.) Our price target of A$5.60ps is set in line with our NPV.
Macquarie doesn’t have a position but sounds bullish:
- Quarterly shipments of 25.9mt came in 8% below our forecasts: The miss related to a number of operational issues, with the focus seemingly being commissioning issues with the new wet front end at Cloudbreak (which saw management drop guidance of hitting the targeted 155mtpa run rate by December). While FMG stressed that this was merely a 1 month slip (which unfortunately runs into cyclone season which blurs progress) with guidance of a 155mtpa sustainable run rate from March 14 reiterated, the market seemingly interpreted this as a 3 month delay.
- Costs outperform: At US$33.17/wmt, C1 costs were 10% below forecast. And while rising strip ratios in coming periods are likely to see this rise in the months ahead (related to the King‟s ramp-up and likely weather disruptions), FMG tightened full year C1 cost guidance from US$36-38/t to a flat US$36/wmt target, pointing to management‟s growing confidence.
- With ~US$1 of the US$3 quarterly C1 Cost reduction coming from lower strip ratios, this implies a return to life of mine strip ratios (which FMG achieved in the June quarter) would see FMG‟s costs rise to just US$34.17 at a A$0.95 fx rate, leaving scope for FMG to be well below the US$36 guidance, even without additional AUD depreciation.
- Product mix not impacting realised prices: Whilst FMG is seeing C1 cost benefits with its blending of Firetail and Chichester ores through lower strip ratios, it has also enabled a higher average product grade, improving the realised price discount to the 62% benchmark by 1.6% QoQ. As a result, the early signs are that the cost savings achieved from lower strip ratios are not hitting revenues and hence point to sustainable margin improvement.
- Weathered the funding storm: Having passed the point of peak gearing, FMG‟s funding pressures are dissipating and the focus appears to be shifting from the debt position to the dividend policy. Indeed, management pointed to significant debt repayments, over coming months‟ and we see FMG within its targeted 30-40% gearing range by the end of FY15 (albeit on above consensus iron ore prices).
I obviously missed the boat on the recent rally and have no inclination to chase it now. My own view is that the iron ore price will fall enough next year to trouble FMG, whose break even costs remain in the mid to high $70 range, but it would be churlish of me to not admit that paying down its debts is a significant turning point.
