Fortescue Metals Group (ASX:FMG)

Elizabeth Gaines
CEO
Market Cap (AUD): 27.22B
Sector: Materials
Last Trade (AUD): 8.99 +0.15 (+1.7%)
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1. About

Since it was founded in 2003, Fortescue has discovered and developed major iron ore deposits and constructed some of the most significant mines in the world. The Fortescue team is focussed on achieving the Company’s vision to be the safest, lowest cost, most profitable mining Company.

Now consistently producing 170 million tonnes of iron ore per annum, Fortescue has grown to be one of the largest, global iron ore producers and has been recognised as the lowest cost seaborne provider of iron ore into China based on Metalytics Resources Sector Economics analysis.

Fortescue’s head office is located in Perth, Western Australia. Fortescue owns and operates integrated operations spanning three mine sites in the Pilbara, the fastest, heavy haul railway in the world and the five berth Herb Elliott Port in Port Hedland.

A natural extension of Fortescue’s supply chain, the fleet of eight Fortescue Ore Carriers were designed to complement the industry best practice efficiency of Fortescue’s Port.

The world leading Eliwana mine and rail project will build on Fortescue’s development and construction capability, utilising the latest technology, autonomous trucks and design efficiency.

Innovation in exploration, process and design is a key component of Fortescue’s strategy to efficiently and effectively deliver products from mine to market.

Fortescue’s longstanding relationships with its customers have grown from the first commercial shipment of iron ore in 2008 to the Company becoming a major iron ore supplier to China, and expanding into Japan, South Korea and India.

As the Company’s primary customers, steel mills in China trust Fortescue to deliver safe, reliable and consistent quality products. The Company is committed to the strategic goals of ensuring balance sheet strength and flexibility, investing in the core long-term sustainability of the business while pursuing low cost growth options and delivering returns to shareholders. 

Fortescue is focussed on ensuring communities benefit from the growth and development of its business. As a proud West Australian Company, Fortescue seeks to set high standards, create positive social change and safeguard the environment and heritage of the regions in which it operates in.

2. Business model

 

The Company operates the following divisions:[1]

 

Division

Revenue ($M)

% of total Revenue

% of Profit (bef Int, Tax, Depn & Amort) ($M)

Profit Drivers[2]

Sale of iron ore

$6,775

98.4%

N/A

  • In FY18, Fortescue delivered NPAT of US$878 M and EPS of 28.2 cents (FY17: US$2,093 M and EPS of 67.3 cents). Underlying NPAT, adjusted for one-off refinancing and early debt repayment costs, was US$1,080 M (FY17: US$2,134 M)
  • During the year, Fortescue’s operations generated Underlying EBITDA of US$3,182 M (FY17: US$4,744 M)
  • The 33% reduction in Underlying EBITDA from the prior year were primarily market driven, with lower prices realised for Fortescue products averaging US$44/dmt in FY18 (FY17: US$53/dmt) and increased shipping rates with the average BCI5 index of US$7/wmt (FY17: US$6/wmt)

Other revenue

$112

1.6%

N/A

3. Strategy

 

Key strategies include:[3]

 

  • The Company seeks to maintain its balance sheet strength and flexibility and continues to invest in the long-term sustainability of its core iron ore business
  • The Company is also prioritising growth primarily through exploration activities and remained focussed on delivering returns to its shareholders
  • Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material

4. Markets

 

The Company operates in the following industries:[4]

 

Industry (Australia)

Industry Revenue

Annual growth (13-18)

Iron Ore Mining

$63 billion (2018)

(1.1%)

Metal and Mineral Wholesaling

$22 billion (2018)

1.2%

Mineral Exploration

$1 billion (2017)

(15.3%)

5. Competition

 

Major competitors include:[5]

 

  • BHP Billiton (ASX:BHP)
  • Rio Tinto Group (ASX:RIO)
  • International Ferro Metals Limited (LON:IFL)

6. History

 

2003[6]  

Founded

 

2006  

Roche Mining announces alliance contract with Fortescue Metals Group Ltd

US$400 million Investment Deal Signed with Leucadia A$535 million Equivalent

 

2012  

Fortescue became Gold Partner of Kookaburras

 

2013  

Fortescue was proud to announce that it had reached its target of awarding $1 billion worth of contracts to Aboriginal businesses as part of its Billion Opportunities initiative

 

2014  

The US$9 billion expansion across port, rail and mining operations was officially opened

 

2015  

Fortescue’s new gas pipeline to Solomon Hub was officially opened

Fortescue launched “Trade Up” Aboriginal Apprenticeship Program

 

2016    

Fortescue Signed Memorandum of Understanding with Vale S.A.

 

2017  

Fortescue announces US$1.0 billion repayment of 2019 Term Loan

 

2018  

Fortescue Metals Group Ltd (ASX:FMG) is launching a US$1.4 billion debt repayment offer for the 2022 9.75% Senior Secured Notes via a tender

Successful Completion of US$500m High Yield Bond Offering

Fortescue announces acquisition of a stake in Atlas Iron

7. Team

 

Board of Directors[7]

 

Andrew Forrest AO – Chairman            

Mark Barnaba AM – Lead Independent Director and Vice-Chair

Elizabeth Gaines – Chief Executive Officer and Executive Director

Sharon Warburton – Vice-Chair

Lord Sebastian – Non-Executive Director

Jennifer Morris OAM – Non-Executive Director

Dr. Jean Baderschneider – Non-Executive Director

Penny Bingham-Hall – Non-Executive Director

Dr. Cao Zhiqiang – Non-Executive Director

 

Management Team

 

Elizabeth Gaines – Chief Executive Officer

Greg Lilleyman – Chief Operating Officer

Julie Shuttleworth – Deputy Chief Executive Officer

Ian Wells – Chief Financial Officer

Danny Goeman – Director Sales and Marketing

Peter Huston – Chief General Counsel and Director Corporate Services

Tim Langmead – Director, External Relations

David Liu – Senior Adviser to the CEO and COO

Linda O’Farrell – Group Manager, Fortescue People

Alison Terry – Group Manager Corporate Affairs and Joint Company Secretary

Gerhard Veldsman – Executive GM Pilbara Operations

Rob Watson – Group Manager Health and Safety


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8. Financials

 

2018 Full Year Results Presentation

 

Financial year 2017/2018 (ended 30 June):[8]

 

Division

Revenue ($’M)

% Change

Profit (before Int, Tax, Depn & Amort) ($’M)

% Change

Sale of iron ore

$6,775

(18.7%)

N/A

N/A

Other revenue

$112

0.0%

N/A

N/A

Total

$8,447

(18.5%)

$3,182

(32.9%)

9. Risk

 

Major risks include:[9]

 

Market Risk

Market risk arises from Fortescue’s exposure to commodity price risk and the use of interest-bearing and foreign currency financial instruments. It is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in iron ore price (commodity price risk), interest rates (interest rate risk) and foreign exchange rates (foreign currency exchange risk).

 

Commodity Price Risk

Fortescue is exposed to the commodity price risk, as its iron ore sales are predominantly subject to the prevailing market prices. Fortescue has limited ability to directly influence market prices of iron ore and manages the commodity price risk through a focus on improving its cash margins and strengthening the corporate balance sheet through refinancing and early debt repayments. The majority of Fortescue’s iron ore sales contracts are structured on a provisional pricing basis, with the final sales price determined using the iron ore price indices on or after the vessel's arrival to the port of discharge. The estimated consideration in relation to the provisionally priced contracts is marked to market using the spot iron ore price at the end of each reporting period with the impact of the iron ore price movements recorded as an adjustment to operating sales revenue. At 30 June 2018, Fortescue had 31 million tonnes of iron ore sales (2017: 27 million tonnes) that remained subject to provisional pricing, with the final price to be determined in the following year. A 10 percent movement in the realised iron ore price on these provisionally priced sales would have an impact on the Group's profit of US$161million), before the impact of taxation. This analysis assumes all other factors, including the foreign currency exchange rates, remain constant.

 

Interest Rate Risk

The Group’s interest rate risk arises from variable rates on the syndicated term loan, finance leases relating to the ore carriers and, to a lesser extent, changes in rates applicable to the short-term deposits forming part of cash and cash equivalents. Fortescue’s policy is to reduce interest rate risk over the cash flows on its long-term debt funding through the use of fixed rate instruments whenever appropriate.

 

Foreign Exchange Risk

Fortescue operates in Australia and is exposed to the movements in the Australian dollar exchange rate, with a significant portion of its operating costs and capital expenditure incurred and paid in Australian dollars.

 

Credit Risk

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to Fortescue, and is managed on a consolidated basis. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions and receivables from customers. Fortescue is exposed to a concentration of credit risk with the majority of its iron ore customers located in China.

 

Liquidity Risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities, by continuously monitoring actual and forecast cash flows and by matching the maturity profiles of financial assets and liabilities.

References

  1. ^ Annual Report 2018, P. 29, 73
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fy18-annual-report-including-appendix-4e-1954136.html
  2. ^ Annual Report 2018, P 29-30
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fy18-annual-report-including-appendix-4e-1954136.html
  3. ^ Annual Report 2018, P. 07, 54
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fy2017-annual-report-including-appendix-4e-1662402.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=65
    http://www.ibisworld.com.au/industry/default.aspx?indid=345
    http://www.ibisworld.com.au/industry/default.aspx?indid=83
  5. ^ http://www.hoovers.com/company-information/cs/competition.FORTESCUE_METALS_GROUP_LTD.520 c1a5f34de789e.html
  6. ^ http://www.fmgl.com.au/about-fortescue/who-we-are
    https://www.asx.com.au/asxpdf/20060605/pdf/3x16wsj8rxgvp.pdf
    https://www.asx.com.au/asxpdf/20060718/pdf/3xlrrn5jsdxfz.pdf
    https://www.isportconnect.com/fortescue-metals-becomes-new-gold-partner-of-kookaburras/
    https://www.australianmining.com.au/news/fortescue-awards-1bn-in-contracts-to-indigenous-companies/
    https://www.miningglobal.com/company/fortescue-metals-group-ltd
    https://www.pipeliner.com.au/2015/05/28/fortescues-gas-pipeline-to-solomon-hub-officially-opened/ http://www.fmgl.com.au/in-the-news/media-releases/2015/09/20/fortescue-launches-trade-up-aboriginal-apprenticeship-program
    http://www.vale.com/EN/aboutvale/news/Pages/vale-fortescue-sign-memorandum-understanding.aspx
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fortescue-announces-us-1-0bn-repayment-of-2019-term-loan-1555856.html
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/successful-completion-of-us-500m-high-yield-bond-offering-1829832.html
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fortescue-announces-acquisition-of-a-stake-in-atlas-iron-1902120.html
  7. ^ http://www.fmgl.com.au/about-fortescue/who-we-are/board-of-directors
    http://www.fmgl.com.au/about-fortescue/who-we-are/executive-team
  8. ^ Annual Report 2018, P. 29, 73
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fy18-annual-report-including-appendix-4e-1954136.html
  9. ^ Annual Report 2018, P. 81-83
    https://www.listcorp.com/asx/fmg/fortescue-metals/news/fy18-annual-report-including-appendix-4e-1954136.html