FMG lifts exports, defeats a decade of debt

Peter KerResources reporter

Apr 30, 2020 – 6.07pm

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Fortescue Metals Group has signalled it is committed to its dividend policy despite the coronavirus clouding the outlook for commodities, after the pandemic and cyclones failed to derail a near perfect year for the iron ore miner.

Fortescue revealed two symobolic victories on Thursday, raising its iron ore export target at a time when big rivals were lowering theirs, and achieving a net cash position for the first time since it became an exporter in 2008.

FMG chief Elizabeth Gaines is overseeing a near perfect year for the miner. Phil Gostelow

The miner had promised to export no more than 175 million tonnes in the year to June 30, but a strong performance over the past nine months prompted it to upgrade that target to as much as 177 million tonnes on Thursday.

The strong output is well timed, given iron ore is fetching abnormally strong prices on the back of export downgrades by Vale and Rio Tinto in the past two months.

Steel production in China, the destination for more than 90 per cent of Fortescue's iron ore, has also been surprisingly robust, with the nation producing more steel in the first three months of 2020 than in the same period of 2019, despite the impact of lockdowns to limit the spread of the virus.

RELATED QUOTES

FMGFortescue Metals Group

$11.96 1.87%

1 year1 day

May 19Aug 19Nov 19Feb 206.008.0010.0012.00

Updated: Apr 30, 2020 – 6.44pm. Data is 20 mins delayed.

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BHPBHP Billiton

$32.35 3.95%

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RIORio Tinto

$87.51 2.34%

May 19Aug 19Nov 19Feb 2070.0080.0090.00100.00110.00

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The buoyant conditions and Fortescue's strong performance saw net debt fall from $US2.9 billion one year ago to a net cash position of $US100 million ($153 million) at March 31.

We are seeing very strong demand for our products, very strong cash generation, so we are in fantastic shape.

— Elizabeth Gaines, Fortescue chief executive

Fortescue will likely return to a slight net debt position at its next reporting date, having paid out $US1.57 billion worth of dividends in early April, but the net cash status is symbolically significant.

Victory in debt battle

It is the first time Fortescue has been net cash since it became an exporter in 2008, and marks a victory in its decade-long battle against a dangerously high debt load, which gave the company a near-death experience in September 2012 when iron ore prices suddenly slumped.

While the Fortescue board will consider the economic outlook when it decides on the company's next dividend in August, chief executive Elizabeth Gaines said she had no plans to deviate from the policy of paying out between 50 per cent and 80 per cent of net profits as dividends.

''We are seeing very strong demand for our products, very strong cash generation, so we are in fantastic shape,'' Ms Gaines said.

If the dividend policy is retained, Fortescue will likely announce a record dividend in August.

That would make fiscal 2020 a year of records for the company, which is on track to deliver record exports, record profits and has in recent months seen its shares rise to their highest ever price on the ASX.

Ms Gaines said Fortescue would seek to work with customers in places like Japan and Korea if they wanted to defer delivery of iron ore, amid concerns that lockdowns could dramatically affect demand in those nations in coming months.

But the company said it was continuing to sell into those markets for now, and was confident it could redirect shipments into China and other markets if needed.

While Fortescue has defied the trend for export downgrades, it joined another trend sweeping the Australian resources sector by downgrading expectations for investment in new projects.

Fortescue was expected to spend up to $US2.4 billion on new iron ore projects this year, but said on Thursday it would now spend no more than $US2.2 billion.

The reduced spend does not involve any cancelled projects; Fortescue said it would reflect the timing of payments on projects that are under way.

New projects

Fortescue expects its new Eliwana iron ore mine to deliver first exports in December, while its Iron Bridge magnetite project should be in production before June 2022.

Those new projects will raise Fortescue's total production volumes and have prompted the company to join BHP in seeking increased export capacity at Port Hedland.

Ms Gaines said Fortescue had asked for its licensed export capacity to increase from 175 million tonnes to 210 million tonnes.

''Fortescue's port operations are world-leading and we have continually demonstrated our capacity to optimise the efficiency and productivity of our port infrastructure to deliver iron ore to our customers,'' she said.

"In line with our strategy to deliver growth through investment in significant projects, including the $US2.6 billion investment in the Iron Bridge high-grade magnetite project, we have applied to the WA Department of Water and Environmental Regulation to increase the licensed capacity of Fortescue’s Herb Elliott Port.

"We are committed to investment in the Pilbara and job creation and are focused on working with the state government to ensure that Fortescue continues to be a significant long-term contributor to the state and national economy through growth and development of our iron ore assets."

Fortescue shares closed 1.8 per cent higher.