Morningstar | Fortescue: Weak Guidance for Fiscal 2019 but AUD 3.70 FVE Maintained
We retain our AUD 3.70 per share fair value estimate for no-moat Fortescue. Fourth-quarter fiscal 2018 production was strong as expected. Iron ore shipments increased 20% to 46.5 million tonnes versus a weak prior quarter. The strong quarter saw full-year shipments of 170 million tonnes, which met guidance.Price realisation was again a weak point. Fortescue realised USD 41 per tonne, which equated to just 63% of the benchmark 62% iron ore index. The benchmark index averaged USD 65 per tonne in the quarter. We lower our fiscal 2018 earnings forecast by 6% to AUD 0.44 per share as a result, and our new fiscal 2018 earnings forecast represents an approximate 50% decline on fiscal 2017. This is almost entirely due to worse discounts for Fortescue’s lower-grade ore. The benchmark 62% iron ore price was virtually unchanged in fiscal 2018 versus a year ago. In fiscal 2019, we expect Fortescue to realise a similar iron ore price of about USD 43 per tonne against USD 44 per tonne in fiscal 2018. Contracting discounts for lower-grade ore, as steel producer margins normalise from elevated levels, should largely offset a forecast 12% decline in the benchmark 62% iron ore price to USD 57 per tonne.
Guidance for fiscal 2019 capital expenditure of USD 1.2 billion is about one third higher than we expected. While negative, the headwind to our fair value estimate is offset by the lower Australian dollar. Part of the expenditure relates to the Eliwana mine, which replaces other mines as they deplete. The new mine is likely part of Fortescue’s strategy to increase the grade of its iron ore by introducing a 60% product stream from fiscal 2019. Lifting the average iron ore grade from the current 58% towards the benchmark 62% should help reduce the realised price discount. Fiscal 2019 production guidance of 165 million-173 million tonnes is as expected. Our forecast remains 170 million tonnes. Fortescue expects similar unit operating costs of USD 12-USD 13 per tonne in fiscal 2019.
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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