It is a good report, no doubt about it, especially in this market. After reading the accompanying presentation, I noted the following about strip ratios. They are forecasting an average ratio of 1.4 for FY17 - FY20, up from 1.2 for FY16. Can any mining experts quantify roughly what sort of overall cost increase that would translate to?
Some assumptions (fairly conservative):
1. For now (until corrected) I am going to assume a 10% increase in overall costs due to strip ratio increasing for those years FY17 - FY20.
2. Average iron ore price of US$45 (taking into account Roy Hill ramping up, Vale expanding, and a possible decrease in demand from China, while some higher cost suppliers drop out.
3. Oil price increases and averages US$55 for those years, having a 5% increase effect on total costs for fmg.
4. Exchange rate remains where it is.
5. Capex spend increases to an average of $400m per year for those years.
These assumptions would put FMG roughly breakeven per the P&L put with free cashflow of around $400m available each year to pay down debt, paying off $US1.6bn over FY17 - FY20.
But after FY20, when strip ratios get ugly and increase by a further 50% to 2.1, costs obviously go up dramatically. By that stage iron ore will probably be at a higher price as well. Being conservative though it still doesn't look all that compelling to me as a long term investment. For anyone that thinks iron ore will be US$50+ for the next few years though and keep trending higher it may be a different story and could be a quite a good investment.
Having said that they are managing their business well, and are doing what they should do from a capital management perspective, cherry pick the best ore to maximise cashflow to pay down debt which will save interest, as well as buying the debt back at a discount. They have huge cash though at US$2.3bn, they should use a big chunk of that to buy back debt and save interest, unless they think they need the liquidity for tough times ahead.
By the way the above are not predictions, just some assumptions for a theoretical valuation of fmg.
FMG Price at posting:
$2.00 Sentiment: Sell Disclosure: Not Held
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