Measuring the native title claim on Fortescue

Via Morgan Stanley:

1st Take: The Federal Court on July 20, recognized native title rights and interests over a large area of the Pilbara in WA that includes FMG’s Solomon Hub (70Mt of 170Mt production). The company responded to the news stating the decision has no impact on the current and future operations or mining tenure at the Solomon Hub,and that it does not anticipate any material financial impact following the Court’s determination. While the company does not expect any material financial impact from this decision, investors question potential outcomes from such a ruling. We see two potential issues worth considering: 1)FMG is liable for historical compensation;2) a new native title royalty is applied to Solomon revenue. Given no specific details on a royalty amount, Exhibit 1 shows the sensitivity of FMG total earnings and valuation to these two issues under different royalty scenarios. We tested the impact of these two issues separately. The back payment was calculated off historical revenue from Solomon Creek at various royalty rates and assumed to be paid as a one-off in FY19. The forward royalty payment was calculated off a typical annual Morgan Stanley forecast for forward Solomon Hub revenue at various royalty rates. The annual per share payment was then aggregated into a 15-year DCF(at 9.2% discount rate). Having run these scenario calculations, it is important to acknowledge that we still need further information regarding if,and how,any financial obligations will be implemented,and whether we need to incorporate it into our base- or bearcase valuations.