fmg bet

The production report announced by FMG on Friday has some key positive aspects:
- Total shipment for the June quarter was 11.5 million tones, with 4.7 mt on June, representing a run rate of 55mt per annum, which is a record rate for FMG;
- Quarterly ore shipped was up 6% on Q210;
- Ore processed in the June quarter was 12.4mt, up 18pc on the Q210;
- Average CFR selling price for the quarter was USD158 per dry tonne reflecting the continuing strength of the iron ore market.

However, the cost control has been disappointing. CAPEX were USD 53.2/5, up 18% qoq and 65% yoy, which is higher than the market consensus. This was due to increasing strip ratio, CC OPF ramp up and strong AUD. These negatives are unlikely to be solved over the short term. The management also forecast that the production in the September quarter will be restrained to 12-12.5mt because of scheduled maintenance shutdown at Cloudbreak and the Herb Elliot port.
Over the medium run (say 3 years), FMG maintains an attractive business outlook.
- China?s demand for iron ore continues to be strong. Any retreat in the iron ore price will be taken as a good opportunity for the Chinese enterprises/investors to build up their stockpiles (or acquire mining companies). As result, the current contract iron ore price of USD 158 pdt are likely to be sustainable over the next two years, allowing FMG to maintain strong profit margins although production costs increase;
- FMG has a sound balance sheet, as its cash at 30 June 2011 was was USD 2.7 billion. Liquidity position has further been strengthened by the 3-year loan of USD 500 million;
- Also, FMG has a number of iron ore projects being developed, which are aggressive but not impractical. If achieved, total annual production would be 155 mtpa, significantly lifting FMG?s Net Asset Value. Up to date, these proposed plans are being processed smoothly, with costs under budget control.
Compared to the big miners such as BHP and RIO, FMG has more upside potentials in terms of valuation. It is also less risky relative to the junior iron ore producers. Therefore FMG appears to be a good bet for investors seeking attractive capital growth with reasonable level of risk.