Iron ore price, page-35217

Scanning through a comparison of FMG & RIO:

• Both have the same 50/50 split of NAV and EV/EBITDA methodology, although a slightly higher discount rate for FMG (9.8% vs 9.2%).
• FMG's NAV is $12.23, well below the current share price whereas RIO's is $132.9 which is a significant difference.
• FMG and RIO have different financial years so the IO price assumptions differ, I presume in the background the same prices are used, it's just which financial year the respective price forecasts fall into that causes the difference.
• FMG's production is expected to increase about 10% over the next 4 years compared to 8.7% for RIO so a bit of a valuation benefit to FMG there.
• FMG's cash costs are expected to increase by 33% over the next 4 years whereas RIO's costs are expected to increase just 9.6% so this is a major difference.
• All other divisional EBITDA returns are mostly expected to increase for RIO over the next 4 years.
• FMG's EPS are expected to decline by -83% compared to -60% for RIO, that's a major difference.

Key takeaways for me when comparing FMG to RIO is RIO has more reliable valuation support due to:

• Cost control which means IO earnings don't drop off as quickly relative to now; and
• RIO obtains significant valuation support from its other divisions leading to a significantly higher NAV.
• FMG's valuation support primarily comes from the EV/EBITDA x4 meaning FMG's valuation is heavily reliant on currently unannounced exploration and other growth factors to be generated from current earnings.

Basically, Goldman's is saying throughout the cycle, RIO has more tangible valuation drives than FMG whereas FMG is more speculative.

RIO.pdf
FMG.pdf
BHP.pdf