CUHRIG
Fortescue Ltd (OTCQX:FSUMF) could have not too long ago modified its identify from Fortescue Metals Group, however it’s nonetheless an iron ore firm.
Because it stands, Fortescue is the fourth-largest iron ore miner on this planet, and the corporate will get most of its income and EBITDA from iron ore.
Fortescue is, nevertheless, diversifying into making an attempt to turn into extra of a inexperienced power and inexperienced metal firm.
Though iron ore costs have strengthened in latest weeks, the medium-term demand for iron ore is much less recognized, given doubtlessly peaking demand from China and extra unsure demand from India and Southeastern Asian nations.
Nonetheless an Iron Ore Firm
As of FY2023, iron ore is the dominant contributor to Fortescue’s revenues and earnings.
Fortescue Annual Report
When it comes to segments, Fortescue’s metals division (which primarily makes iron ore) accounted for US$16.764 billion in income and US$10.545 billion in underlying EBITDA. The corporate’s power enterprise, which incorporates renewable power and producing inexperienced hydrogen, in the meantime, had US$107 million in income and a lack of US$617 million in underlying EBITDA. Total, the corporate had consolidated income of US$16.871 billion and underlying EBITDA of US$9.963 billion.
Fortescue has a low value of manufacturing of iron ore given its reserves. The corporate’s underlying EBITDA margin for 2023 was 60% US$/dry metric ton when excluding Fortescue Power. That’s down from 63% for 2022, however however excellent. Total, Fortescue had an underlying EBITDA margin of 59% for 2023, down barely from 61% for 2022.
Given the place iron ore costs have been, Fortescue has been pretty worthwhile.
For the yr ended June 30, 2023, Fortescue had income of US$16.871 billion, underlying EBITDA of US$9.963 billion, and web revenue after tax of US$4.796 billion. Earnings per share have been US$1.56. Underlying web revenue after tax was US$5.522 billion and underlying earnings per share was US$1.8.
Inexperienced Hydrogen
Fortescue’s different enterprise, Fortescue Power, is concentrated totally on producing business scale of inexperienced hydrogen and inexperienced power.
Fortescue Investor Presentation
Inexperienced hydrogen, which is hydrogen created by renewable power, may also help decarbonize industries like metal manufacturing. With environmentally pleasant methods, metal mills can instantly cut back iron ore with inexperienced hydrogen and decrease their emissions considerably earlier than processing the fabric additional to supply ‘inexperienced’ metal.
Robust demand for inexperienced metal is predicted sooner or later as metal manufacturing at the moment accounts for round 7% of world carbon emissions and is difficult to decarbonize. There are different methods of manufacturing inexperienced metal that don’t contain inexperienced hydrogen as effectively.
When it comes to objectives, Fortescue hopes to supply 15 million tons of inexperienced hydrogen yearly by 2030. With a considerable portion of the inexperienced hydrogen, Fortescue hopes to supply inexperienced metal. By producing inexperienced metal, Fortescue hopes to be an built-in inexperienced metal producer, given its hydrogen and iron ore manufacturing capabilities. By producing inexperienced metal in Australia, the corporate additionally doesn’t should ship hydrogen, which is pricey.
If the economics work out, Fortescue might additionally in the future be an exporter of inexperienced hydrogen. In line with Deloitte, the inexperienced hydrogen market is predicted to surpass the worth of liquid pure gasoline by 2030.
In line with a McKinsey report in November 2022, McKinsey analysis estimates that complete hydrogen demand might enhance to 600 to 660 million tons by 2050, serving to cut back over 20% of world emissions.
With nations like Japan and South Korea with bigger populations and fewer renewable power technology assets accessible by sea, Australia would have a available market.
Along with Australia, Fortescue can be creating inexperienced hydrogen initiatives in areas equivalent to Phoenix in america.
Whereas there’s anticipated to be substantial demand for inexperienced hydrogen and inexperienced metal, the spending on inexperienced hydrogen and producing inexperienced metal will take a variety of capital expenditures within the close to time period and the return on fairness of the enterprise will seemingly not be excessive given the capital-intensive nature. It’s unlikely to be anyplace close to the 31% return on fairness on underlying earnings as Fortescue realized in 2023.
Quarter Ended September 30
For the quarter ended September 30, Fortescue shipped 45.9 million metric tons of iron ore, 3% decrease than the corresponding interval of the earlier yr.
The corporate’s Pilbara Hematite C1 value was US$17.93/moist metric tonnes, or up 1% yr over yr.
Fortescue Quarterly Outcomes
The corporate had a web debt of US$2.2 billion as of September 30, 2023, which suggests the corporate’s stability sheet may be very robust given its underlying EBITDA of US$9.963 billion for the yr ended June 30, 2023.
For FY2024, administration sees iron ore shipments of 192-197 million metric tons.
For the interval, administration expects C1 value of Pilbara Hematite to be from US$18-US$19/moist metric tonnes.
Valuation
Given it’s nonetheless predominantly an iron ore firm, Fortescue’s earnings rely on how robust iron ore costs are.
If the value of iron ore is robust within the subsequent 10 years, Fortescue will seemingly be a great funding.
If the value of iron ore decreases, the corporate might face headwinds.
I feel there shall be much more infrastructure constructed within the subsequent ten years as governments spend extra to enhance dwelling requirements and promote financial development. However, I additionally suppose there shall be extra iron ore provide as effectively. Metal recycling may very well be cheaper and more practical and extra iron ore mines will come on-line within the subsequent few years. Likewise, metal recycling and different applied sciences might additionally compete in opposition to the inexperienced metal Fortescue plans to make.
In the long run, expertise might cut back the price of producing iron ore. It may additionally enhance iron ore demand considerably. I’m not actually certain how the 2 will have an effect on Fortescue’s long-term earnings given the uncertainty.
Within the medium time period, how effectively Fortescue does rely on how robust the demand in China is and the way robust the demand from different rising markets is.
Given China imports round 70% of the world’s international seaborne iron ore, the corporate’s EBITDA is closely affected by how a lot the nation imports.
When it comes to China based on Rio Tinto iron ore CEO Simon Trott, “China is nearing a structural peak when it comes to its demand.“
China is much less involved about their financial development price than earlier than because the nation has already developed considerably. China’s management appears extra involved concerning the high quality of development reasonably than GDP development in any respect prices. As such, the federal government won’t spend as a lot on infrastructure because it did earlier than to assist rebound financial situations.
When it comes to different creating nations in Asia that might import iron ore, demand is predicted to extend, but it surely isn’t sure that demand might offset any lower in China’s demand.
In line with mining analyst Lachlan Shaw of UBS:
“We have to do extra to know what the demand development profile appears like popping out of South-East Asia and India, to get extra consolation in how that offer and demand stability will come collectively.”
Though India is a creating nation with a bigger inhabitants than China, the nation has its personal iron ore reserves.
Given the uncertainty within the medium time period, and likewise the probability that Fortescue’s inexperienced power and inexperienced metal efforts will take a variety of capital funding that gained’t seemingly be worthwhile for some time, I price the inventory a ‘Maintain’ or sideline.
Fortescue doesn’t commerce for a excessive valuation.
In FY2023, the corporate shipped 192 million metric tons of iron ore and had C1 value of US$17.54/moist metric tonne. Fortescue earned US$1.56 giving the corporate a P/E ratio of 10.69 for the interval on the worth of US$16.67 as of December 5.
Given administration expects to ship 192-197 million metric tons for FY2024 and the C1 value of Pilbara Hematite is predicted to be US$18-US$19/moist metric tonnes, the last word manufacturing is across the identical and the prices are barely larger. If common iron ore costs are barely larger for FY2024 than FY2023, I feel Fortescue might earn roughly round the place it earned final yr. The one uncertainty, nevertheless, is how a lot administration spends on its inexperienced power efforts.
Trying previous the following yr and extra into the long run, nevertheless, Fortescue might want to do effectively in inexperienced hydrogen and inexperienced power to offset any potential uncertainty from much less Chinese language iron ore demand.
Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. change. Please pay attention to the dangers related to these shares.
