Immense discounting hammers Fortescue

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.

FMG also slashed its dividend payout ratio to 70% from 80% and it will very likely fall further as the company tries to transition to green industries amid falling iron ore prices.

Houses and Holes

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