Fortescue Metals Full Year Result: FMG meets earnings expectations, blows past dividend estimates

Fortescue Metals Group (FMG) reported a full year net profit after tax of US$2,093 million and earnings per share of 67.3 cents. Both measures were a substantial improvement on the previous year helped in large by increased margins and reduced financing costs. In FY17, FMG delivered 170.4 million tonnes of iron ore, a 1% increase on 169.4 million tonnes a year earlier. Over the 12 months of FY17, the average realised price of iron or increased to US$53 per dry metric tonne (dmt), compared to US$45/dmt in FY16. 

 Improved margins were helped by continued cost improvements. Over the course or recent quarters, C1 costs averaged US$12.82 per wet metric tonne (wmt) in FY17, a 17% improvement over the prior year. C1 costs fell as low as US$12.16/wmt during the June quarter. (C1 costs are comprised of Mining and processing costs, Rail costs, Port costs & Operating leases). Further incremental cost improvements are expected in the next 12 months , with full year the FY18 C1 cost estimated to be in the range of US$11-12/wmt, assuming a forecast of $US 0.75 for the Australian dollar exchange rate and an WTI oil price of US$53 per barrel. 

 A 74% improvement in operating cash flow to US$4,256 million allowed FMG to continue its focus on debt reduction over the course of 2017 with repayments totalling US$2.7 billion. As result FMG’s net debt position fell from US$5,188 million to US$2,633 million (including finance leases & cash on hand). In the process, the miner’s interest expense was reduced by US$191 million to US$430 million, compared to US$621 million in the previous year. Net gearing was also reduced to 21 per cent. FMG’s sensitivity to interest rates means that a change of 0.05% (five basis points) in interest rates in its variable instruments would have an impact of $1 million on the group’s profit (assuming other factors such as foreign exchange rates remain constant). 

 FMG declared a final fully franked dividend of A$0.25 per share, increasing total FY17 dividends to A$0.45 per share. The payment reflects a 52% pay-out of net profit after tax, substantially ahead of the half year result which saw a net profit payout ratio of 38%. Looking ahead FMG expects the payout ratio to increase further to be in the range of 50% and 80% of net profit. FMG also expects to ship 170mt of iron ore in FY18, consistent with FY17 figures. 

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