Debt-Cutting Fortescue Can Reward Equity Investors Too on Rally

  • Producer to boost dividends, maintain debt drive: CEO Power
  • Rio Tinto, Anglo also lifting returns amid prices revival

Fortescue Metals Group CEO Nev Power discusses his outlook for iron ore and talks about the company's earnings and performance. He speaks on 'Bloomberg Markets.' (Source: Bloomberg)

Fortescue Metals Group Ltd. will seek to further boost investor payouts while maintaining a drive to slash debt, as the world’s fourth-biggest iron ore exporter joins other top miners in lifting returns amid a price rebound.

“Our debt is now paid down to a level where we are able to start increasing the returns to shareholders,” Chief Executive Officer Nev Power said Monday in an interview with Bloomberg Television. “We’ll continue to pay that down, but at the same time we’ll also continue to increase returns.”

Fortescue declared a total annual dividend of 45 Australian cents a share, compared with 15 cents a year earlier, topping the average 39 cent forecast among 19 analysts surveyed by Bloomberg, the company said Monday when reporting full-year earnings.

Perth-based Fortescue expects to pay between 50 percent to 80 percent of net profit after tax in dividends in the current fiscal year and in future years under a new policy, Power said. It’s payout ratio for fiscal 2017 was 52 percent. The producer repaid $2.7 billion of debt in fiscal 2017 and lowered net debt to $2.6 billion as of June 30, it said earlier in a statement.

Rio Tinto Group aims to pay a $2 billion interim dividend and increased its share buyback by $1 billion this year on stronger materials prices, while Anglo American Plc last month announced plans to resume dividend payments about six months ahead of schedule. BHP Billiton Ltd. is forecast to raise its full-year payout to 88 cents a share when it reports earnings Tuesday, according to the average of 15 analysts’ forecasts.

“They are making hay while the sun shines, and it’s been a while coming,” said James Wilson, a Perth-based analyst at Argonaut Securities Ltd. “Hard times have driven a lot of innovation, and the miners are now very lean and extremely efficient -- when prices come back, they pop in a big way, and make a lot of money.”

Iron ore, the top earning material for Fortescue, BHP and Rio, has rebounded since mid-June on strong steel demand in China and weaker-than-expected gains in low-cost supply. Fortescue, which cut cash operating costs 17 percent in fiscal 2017, plans to hold annual shipments at the current rate of 170 million tons, the producer said last month.

Spot ore with 62 percent content in Qingdao advanced 3.4 percent to $77.94 a dry metric ton on Friday, the highest price since April, according to Metal Bulletin Ltd. Prices are likely to retreat to the $55 to $65 a ton range with signs that China’s mills are returning to a focus on minimizing operating costs, Fortescue’s Power said in the interview.

Fortescue jumped 6.4 percent to A$5.85 at 3:35 p.m. in Sydney trading. The potential for higher returns over the next 12 months may attract renewed investor interest, Melbourne-based RBC Capital Markets analyst Paul Hissey said Monday in a note.

To watch RBC’s Hissey discuss the iron ore outlook, click here

The producer’s full-year profit more than doubled on higher prices to $2.1 billion in the year ended June 30, compared with $985 million a year earlier, Fortescue said. That missed the $2.2 billion average of 11 analysts’ estimates compiled by Bloomberg.

(A previous version of this story corrected the dividend estimate in the second paragraph.)

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