Immense discounting hammers Fortescue

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Fortescue’s half-year was an eye-popper:

• Ongoing improvement in safety with the Total Recordable Injury Frequency Rate (TRIFR) of 1.8 for the 12 months to 31 December 2021, 14 per cent lower than 31 December 2020
• Strong operating performance across the supply chain contributed to record half year iron ore shipments of 93.1 million tonnes (mt), three per cent higher than H1 FY21
• Underlying EBITDA of US$4.8 billion for the six months ending 31 December 2021 (H1 FY22), with an Underlying EBITDA margin of 59 per cent
• Net profit after tax (NPAT) of US$2.8 billion and earnings per share (EPS) of US$0.90 (A$1.24)
• Net cashflow from operating activities of US$2.1 billion after payment of the FY21 final tax instalment of US$915 million
• Capital expenditure of US$1.5 billion, inclusive of US$589 million investment in the Iron Bridge growth project and the Pilbara Energy Connect decarbonisation project
• Fully franked interim dividend declared of A$0.86 per share, representing a 70 per cent payout of H1 FY22 NPAT
• Strong balance sheet maintained with net debt of US$1.7 billion at 31 December 2021, inclusive of cash on hand of US$2.9 billion
• Announced an industry leading target to achieve net zero Scope 3 emissions by 2040
• Recognised for outstanding corporate sustainability performance with the inclusion in the 2022 S&P Global Sustainability Yearbook with a Gold Class Sustainability Award
• Fortescue Future Industries continues to rapidly advance a global portfolio of green energy projects and decarbonisation technologies
• Guidance for FY22 shipments, C1 cost and capital expenditure is unchanged

The problem is the grade discounting at 30% to benchmark over the past six months. The spread has widened even further in recent weeks to 66%. This is clearly painting a weak iron ore market picture under the bonnet.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.