Fortescue delivers what BHP and Rio Tinto couldn't - a profit and dividend increase

So far this week, two of the big three iron ore miners have released results that reflect one thing: How much more difficult it is to beat analyst expectations when the iron ore price (and the Chinese economy) is under pressure. Had it not been for a beat on the dividend payout for both BHP (ASX: BHP) and Rio Tinto (ASX: RIO), it's very possible the declines could have been far more material. 

But what about Fortescue (ASX: FMG)? Although it is exposed to the same themes and raised its interim dividend much like its two larger counterparts, it's also had some bad press in recent times. Its CEO has changed twice in the last year - with the shift from Fiona Hick to Dino Otranto reducing the company's market capitalisation by $3 billion.

More broadly, Fortescue is making the biggest push of the three major miners into green hydrogen and carbon capture technologies. But the timing around those projects reaching profitability remains under scrutiny. 

To discuss the Fortescue result, its outlook, and most importantly, its production guidance, I spoke to Janus Henderson's Tim Gerrard. Fortescue is a "modest" holding in the Janus Henderson Global Natural Resources Fund. 

Fortescue (ASX: FMG) 1H FY24 Key Results

• Revenue +21% year-over-year to $9.51 billion
• Underlying EBITDA +36% to $5.91 billion
• NPAT +41% to $3.33 billion
• Fully franked interim dividend A$1.08/share vs year-ago A$0.77/share
• FY Guidance left unchanged: 
• Iron ore shipments 192-197Mt, including Iron Bridge 2-4Mt
• C1 cost Pilbara hematite $18-19/t
• Metals CAPEX $2.8-3.2 billion
• To read the full list of company results, visit Market Index.

1. In one sentence, what was the key takeaway from this result?

Steady and delivered as expected. There were no unpleasant surprises as FY24 guidance was maintained. Iron ore continues to deliver but energy struggles to scale and executive turnover remains unaddressed.

2. Were there any major surprises in this result that you think investors should be aware of?

There were no major surprises as the results speak for themselves. EBITDA of US$5.9 billion (6% ahead of consensus) and NPAT of US$3.3 billion which was in line. Net debt is also next to nothing. The negative surprises are more along the lines of what is not communicated, primarily around its much-hyped hydrogen strategy.

They have identified projects to produce 10,000-20,000 tpa here and there, but it's hardly a 1/1000^th of the 2030 aspirations. The presentation is also happy to mention that 14% of the Pilbara workforce is indigenous but no mention of risks from the looming compensation court case brought by the Yindjibarndi people.

3. Would you buy, hold, or sell this stock on the back of this result?

Rating: HOLD

We make no change to our HOLD recommendation although other iron ore producers are preferred. Steel is key in the modernisation of the energy sector and the higher-grade iron ore producers are better equipped to help customers reduce their carbon footprint, leaving Fortescue at somewhat of a disadvantage.

4. What’s your outlook on this stock and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

Investors will be well aware of the risks. Given executive turnover, there is a question mark around culture. There is a risk of a loss in investor confidence should the hydrogen strategy prove to be one of over-promising and under-delivering. FMG has failed in the delivery of its Iron Bridge project which takes some of the gloss off claims to be a successful developer of large-scale projects.

We have a neutral outlook on FMG but it could turn bullish should the Chinese property sector recover more quickly than expected.

Asian steel markets need to remain strong with China likely to maintain exports into this region. There is always the risk on the upside as to iron ore mine supply disruptions whether in Brazil or Australia which can quickly tighten the market.

5. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?

Rating: 2

The resources market in our view is cheap at 1-2. We’re excited about the outlook for the sector which is often overlooked despite the importance of its products and the financial strengths of many of its participants.

Electrification across the globe is dependent on resources and supply is already tight which bodes well for pricing upside and the incumbents with massive endowments of commodities. Demand over the last 10-20 years has been China-driven but the next decade is likely to be driven by China and the Rest of the World, partly driven by electrification.

The lithium sector is likely to rebound in the next 9-12 months as global supply chains adjust to lower EV penetration rates that are nonetheless robust. Copper, in particular, looks set for a re-rate. 

Producers have lowered production forecasts over the last six months and more downward revisions are expected. Civil disruption has closed the Cobre Panama mine. BHP has delayed a decision on a new plant in Chile. 

Six months ago, the market was expecting a surplus in 2024 and 2025. Now, it's more of a matter of how large will the deficit be as electrification takes hold. Iron ore is likely to continue to provide a positive ballast, and uranium as well.

Managed Fund

Janus Henderson Global Natural Resources

Global Shares

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>>Read the announcement – Fortescue 1H24 results announcement

>>View the presentation – Fortescue 1H24 results presentation

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