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Fortescue Metals Group Ltd (FMG.AX)
Site Visit – Commissioning Well Despite Mine
 Mine Constraint — Mine production constrained by overburden removal which
is behind schedule, but contractors on site to catch up. Production target
remains 45mtpa rate by year end and 55mtpa by end-1Q09. Production might
reach the 22mt target for 2008, but shipments likely to fall short. Other key
issue is getting moisture content down to 7% target, currently ~9%. Rail and
port infrastructure is operating well and waiting to be pushed by the mine.
 Expansion Plans — Current economic/credit crisis has slowed expansion
ambitions to what can be funded by cash flow. Revised plan is 80mtpa by end-
2009, 120mtpa by end-2010 and 160mtpa by end-2011. Still very ambitious
targets in an over-supplied market, but if credit and iron ore markets improve
in 2H09, expansions could be back on the fast-track. Capex A$2b+ to get to
80mtpa, additional A$2.5b to get to 120mtpa and another A$2.5b to reach
160mtpa, all excluding leased mine fleet.
 Iron Ore Market — In deteriorating iron ore market, we forecast a 20% price cut in
2009, but risk is to the downside given spot price collapse to US$67/t delivered
implies a 33% decline. Price risk is a threat to funding expansion capex from cash
flow, but could be largely offset by the A$ fall, which is proving an unexpected
kicker under current contract prices (realising A$120+/t v budget of A$95/t).
 Contracts — FMG has had only had one customer fail to take a shipment due to
inability to get a letter of credit, but this shipment was taken by another
customer. Whilst there are no sales into the spot market and off-take contracts
up to almost 100mtpa, the risk of customers delaying/cancelling shipments in a
rapidly softening market is a very real and significant risk.
FMG.AU (Y/E Jun) 2008A 2009E 2010E 2011E
Reported Profit (A$m) -2,516.2 1,519.7 1,594.6 1,838.3
Core Net Profit (A$m) -89.9 1,519.7 1,594.6 1,838.3
Core EPS (A¢) -3.2 53.9 56.6 65.2
Core EPS Growth (%) -158.9 1,780.1 4.9 15.3
PE Ratio (x) -89.7 5.3 5.1 4.4
DPS (A¢) 0.0 0.0 0.0 0.0
Dividend Yield (%) 0.0 0.0 0.0 0.0
Franking Rate (%) 0.0 0.0 0.0 0.0
P/Operating Cashflow (x) -22.0 4.2 3.7 3.1
ROE (%) na na 281.7 72.1
Source: Powered by dataCentral
Buy/High Risk 1H
Price (27 Oct 08) A$2.88
Target price A$4.50
Expected share price return 56.3%
Expected dividend yield 0.0%
Expected total return 56.3%
Market Cap A$8,085M
US$5,040M
Price Performance (RIC: FMG.AX, BB: FMG AU)
See Appendix A-1 for Analyst Certification and important disclosures.
Clarke Wilkins1