Morningstar | Fortescue Benefiting from Near-Term Iron Ore Supply Issues, but Shares Overvalued
Fortescue's accelerated development plans and unprecedented volume growth, fuelled predominantly by debt, saw the company rapidly rise to become the world's fourth-largest iron ore miner. Earnings grew considerably, and Fortescue established itself as a large second-tier player. Operating leverage is high, with margins are below those of peers BHP, Rio Tinto, and Vale, mainly due to the production of lower-grade iron ore, which attracts a discount to the 62% benchmark. Considerable debt repayment has lowered financial leverage and the balance sheet is sound. Fortescue built its assets during the iron ore boom, meaning the unit cost of its installed capital base is higher than the established majors, who benefit from investments made when industry capital costs were much lower. Development of the 22 million tonne a year Iron Bridge magnetite mine will add a higher-cost but higher-value 67% grade iron product.Fortescue Metals Group is an iron ore producer. As of June 30 2016, Co.'s operations had four mine sites in the Pilbara. The Chichester Hub, which includes the Cloudbreak and Christmas Creek mines, is located in the Chichester Ranges and the Solomon Hub, in the Hamersley Ranges, includes the Firetail and Kings Valley mines. Co. owns and operates an integrated supply chain including its Herb Elliott Port in Port Hedland and a heavy haul railway with over 620km of track. As of June 30 2016, Co.'s total hematite ore proved and probable reserves were 2.17 billion tonnes. Also, as of June 30 2016, Co.'s total magnetite ore proved and probable reserves were 705.0 million tonnes.
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