In the wake on Fortescue’s break out third quarter, UBS has upgraded the stock to “buy” so let’s revisit our FMG numbers and see if doom has been dodged. Here’s UBS:
41.9Mt shipped at realised price of US$50/dmt cfr FMG announced SQ 15 total shipments of 41.9Mt (inclusive of BCI tonnes), -1.2% q/q and cf UBSe of 42.3Mt. This implies an annualised shipping rate of 166Mtpa. FMG ore shipped was 40.8Mt, -1.2% q/q cf UBSe of 41.4Mt. We had been expecting a strong quarter for shipments ahead of the wet season. C1 cash costs were US$16.90/wmt, below our estimate of US$18.00/wmt. Guidance for FY 16 remains 165Mt at US$18/wmt fob (A$ US77 cents), however FMG now expect to exit FY 16 at US$15/wmt fob (A$ US72 cents). FMG realised a price of US$50/dmt cfr for the quarter, ahead of our estimate of US$47/dmt cfr. The impurity discount excl. Fe-adj. but including any QP adjustment declined to ~US$1.50/t for the quarter, below the US$2.64/t estimated for JQ 15, and below our estimate of US$4.50/t.
FMG continues to surprise in terms of cost performance (7 consecutive quarters of cost decline) and realised pricing. The lower impurity discount has seen us lower our long run discount from US$6/t to US$5/t adding 25cps to our valuation, while lower unit costs of US$1/t has added a further 30cps, lifting our NPV to $2.85ps. Our revised assumptions now see FMG’s all-in cash breakeven price on a Platts 62% Fe equivalent basis at US$37/dmt cfr (pre interest of US$3.75/t) at an A$ of US73 cents. With our expectation that iron ore pricing is likely to hold in the US$50-60/dmt cfr range we see FMG being able to continue to deleverage and with that we expect the market to ascribe more value to FMG’s equity. We lift our rating to Buy from Neutral and raise our price target to A$2.85ps.
