This was the Afr article today with respect to the 2 price targets and also the reference to fmg by macrobusiness
BUSINESS
Fortescue urged to reduce exports, raise iron grades
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by
Peter KerNovember 3 2017 - 11:17AM
Fortescue Metals Group has been urged to consider reducing export volumes in a bid to boost its iron grades and received prices, as analysts predict a perfect storm of factors could reduce the miner to a loss-making position within two years.
Evans & Partners analyst Andrew Hines said life would get progressively tougher for Fortescue in coming years, as rising energy and currency costs combined with mine depletion and
persistent pricing discounts.
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Analysts predict a perfect storm of factors could reduce the miner to a loss-making position within two years. Photo: Bloomberg
The latter factor has dominated debate around Fortescue in 2017, as the discount applied to its product has widened from an average of 12 per cent in fiscal 2016 to 23 per cent in fiscal 2017.
The company warned last week that the discount would average between 25 per cent and 30 per cent over the current financial year.
Mr Hines said it could be time for Fortescue to reverse
the operating strategy that allowed it to reduce its cost of production from north of $US50 per tonne to barely $US12 per tonne over the past five years.
A key part of that dramatic cost reduction was the blending of low grade and high grade iron ore, which allowed the company to spend less time and money moving waste, but also lowered the average iron grades in its final product.
"Five years ago Fortescue deliberately lowered the average grade of its product by lowering the cut-off grade at its Cloudbreak operation to allow it to reduce the strip ratio and therefore production costs," said Mr Hines in a note to clients.
"A key question is what Fortescue will do once the Firetail mine begins to deplete from 2020. It will need to find a new source of ore to blend with, or cut-off grades will rise again.
"In our view, Fortescue should consider reversing this strategy and increasing its cut-off grade to ship higher grade ore. The downside is that production costs would rise. Fortescue has to optimise between volume, price discounts and costs.
"It may be that shipping less ore but at a higher grade would maximise Fortescue's margins."
Evans & Partners predicts ores with 62 per cent iron, the industry benchmark, will average $US55 per tonne in fiscal 2018 including the cost of freight to China, before dropping to $US45 per tonne and $US47 per tonne in fiscal 2019 and fiscal 2020, respectively.
The firm also expects shipping and energy costs to rise, along with capital spending requirements as Fortescue is forced to replace depleted mines.
Mr Hines said that perfect storm of factors could reduce Fortescue, which reported a $US2.1 billion ($2.7 billion) net profit in August, to a narrow loss in fiscal 2019.
"On our projections, Fortescue's earnings are likely to decline over the next two years as declining prices and rising costs squeeze profitability. We model Fortescue reporting small losses in FY19 and FY20; essentially break-even," he said in a note.
"Current conditions are as good as it is going to get for Fortescue. We think Fortescue will face a number of headwinds over the next few years."
Fortescue had $US2.63 billion of net debt at June 30, and $US4.4 billion of gross debt.
None of that debt is due to be repaid until 2022when almost $US3 billion of it matures, and the company believes that schedule means it has time on its side.
Mr Hines downgraded his target price for Fortescue shares from $3.90 to $3.30; well below the $4.87 the stock was fetching on Thursday.
The analysts at First New Zealand Capital were more upbeat, putting a $6.80 target on Fortescue shares.
FNZC said Fortescue's current share price assumed the company's iron ore would attract a 20 per cent discount, but the analysts warned the share price could fall to $1.40 if discounts were ultimately closer to 30 per cent.
"The downgrade to FY18 realisation guidance just two months after the August result was disappointing ... the longer the cyclical versus structural debate goes on the more we're happy to concede that the latter's argument gains more momentum," the analysts said.
Earlier this week Fortescue's departing chief executive
Nev Power said he did not believe the iron ore market warranted further supply expansions.
Mr Power has announced his intention to retire from the chief executive's post within months, and the First New Zealand Capital analysts noted that such a big change could affect the stock.
"We can't help but note that management change all too often precedes a period of underperformance, or in the very least uncertainty. We believe Nev Power's track record speaks for itself having made big achievements across tonnage, debt reduction and the cost base without any increase in the share count," the analysts said.
"Whilst any new leader will have a chairman and board in place to help guide and mentor to the FMG way, the next 12 months at least appear to be about the market [discounts especially] and capital deployment towards yet to be sanctioned opportunities."
(20min delay)