Fortescue Profit Jumps Threefold as Cost Cuts Boost Margins

Fortescue Full-Year Net Profit Jumps Threefold
  • Market outlook positive in FY 2017 on China demand: CEO
  • Biggest iron ore producers’ cost cuts to grind lower: analyst

Fortescue Metals Group Ltd., the world’s fourth-biggest iron ore exporter, reported full-year profit rose more than threefold to beat analysts’ estimates as costs fell and margins increased.

Net income was $984 million in the year ended June 30, compared with $316 million a year earlier, the best performer this year among Australia’s 100 largest companies said Monday in a statement. That beat the $910 million average of 10 analysts’ estimates compiled by Bloomberg.

The producer declared a dividend of 12 Australian cents a share, a record amount for a half-yearly period, to beat a 6.4 Australian cent average forecast among 18 analysts’ forecasts. The total dividend rose to 15 Australian cents.

Iron ore has rebounded in 2016 from three straight annual declines on demand from China, the biggest buyer. Perth-based Fortescue cut cash production costs 43 percent in fiscal 2016 as the largest producers, including BHP Billiton Ltd. and Rio Tinto Group, ease the pace of supply increases and continue to chase cost savings to boost margins.

“Fortescue is in control of the cost base and the backdrop is still favorable,” Peter O’Connor, a Sydney-based analyst with Shaw and Partners Ltd. “From here, Fortescue and their peers will grind lower, rather than step-change lower. It will be a case of cents lower, and not dollars.”

Cash costs fell to $14.31 a wet metric ton in the three months ended June 30 from $22.16 a ton a year earlier and the company is aiming to make further reductions, Fortescue said. The producer cut $2.9 billion of debt in fiscal 2016 and has options to continue early repayments or refinancing, the statement said. Net debt was $5.2 billion on June 30.

Fortescue fell 1.6 percent to A$4.85 at 10:53 a.m. in Sydney trading. Its shares have surged 159 percent in 2016 on the price rebound.

The market outlook in the current financial year “is positive as urbanization and industrialization in China underpins ongoing domestic steel demand and regional growth through the massive One Belt, One Road infrastructure plan,” Chief Executive Officer Nev Power said in the producer’s annual report, also published Monday.

Prices are likely to trade between $55 and $65 a metric ton over the next 18 to 24 months, before seeing gains, Jay Hambro, chairman of producer IRC Ltd. said this month. Ore with 62 percent content delivered to Qingdao rose 0.4 percent to $60.95 a dry ton on Friday, according to Metal Bulletin Ltd.

Iron ore producers including Fortescue, BHP and Rio are likely to face rising energy prices and a strengthening Australian dollar, which will limit their ability to continue dramatic cost cuts, according to Shaw’s O’Connor. “It’ll be more modest, albeit none of these guys will give up,” he said. BHP said last week that its cash costs fell 19 percent to $15.06 a ton in the year ended June 30.

“Successful cost improvement measures and lower capital expenditure have more than offset the impact of falling iron ore prices to generate strong free cash flow,” Fortescue’s Power said in the statement. The producer’s full-year underlying profit margin jumped to 45 percent from 29 percent a year earlier, while revenue fell 17 percent after a 29 percent drop in average prices.

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