FMG – Q3 Update

Fortescue recently released quarterly numbers as well as another updated presentation today from the Macquarie conference.  FMG’s share price has been getting a beatdown lately, I think largely due to the lower Q3 production, increase in C1, and low revenue realisation.

But the company continues to spew out masses of cash – $1.4B USD in HY18, and NPAT of $681M USD.  That’s around 8x earnings for a business that will continue to generate money for the next century and is currently suffering difficult operating conditions.

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There is currently a significant gap between the Platts 62 price and FMG – thanks to China’s desire to limit pollution during their winter by focusing on higher cost ores.  I would expect to see a reversion to the mean, either by a change in policy, more ore being processed in India, or new technology improving the useability of lower-grade ores.

 

Just in case that doesn’t happen, the new Eliwana development will improve FMG’s blended content to 60% Fe.  As I wrote in my original post, while FMG is not a perfect business, they are very cheap, and will be profitable throughout the commodity cycle.  I continue to hold my shares, average buy around $4.95.  There is room to buy more although I’ll probably build up more cash reserves waiting for better opportunities.  In the meantime I plan to sit back and continue to collect the dividends, as I watch how the landscape develops.

 

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