##{"id":59007,"date":"2011-10-18T11:41:43","date_gmt":"2011-10-18T00:41:43","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/10\/18\/fortescue-awaiting-the-re-rating\/"},"modified":"2011-10-18T11:41:43","modified_gmt":"2011-10-18T00:41:43","slug":"fortescue-awaiting-the-re-rating","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/10\/18\/fortescue-awaiting-the-re-rating\/","title":{"rendered":"Fortescue Awaiting The Re-Rating"},"content":{"rendered":"

\n\t– Fortescue<\/span> quarterly production report well received
\n\t– Management confident in maintaining annual production rate of 55Mtpa<\/span>
\n\t– Brokers continue to see value at current levels
\n\t– Buy ratings retained<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tThe September quarter production report from Fortescue<\/span> Metals ((FMG<\/span>)) has been well received by the market, with both tonnes<\/span> and costs coming in either in-line or better than most expectations. Total ore shipments for the period were 12.4 million tonnes<\/span> at a unit cost of around US$50 per tonne<\/span>. The only disappointment was a slightly lower than expected achieved price of US$160 per tonne<\/span>.<\/p>\n

\n\tPost the production report brokers have made minor changes to earnings estimates, UBS the most significant in lifting its net profit after tax estimate for FY12<\/span> by 6%. Consensus forecasts in earnings per share (EPS) terms stand at US72.3c<\/span> in FY12<\/span> and US78.1c<\/span> in FY13<\/span>.<\/p>\n

\n\tAlong with the production report, management has expressed confidence in being able to maintain an annualised<\/span> production rate of 55 million tonnes<\/span> per annum. Citi<\/span> estimates this equates to shipments for the December quarter of 13.5-14 million tonnes<\/span>. <\/p>\n

\n\tAccording to BA Merrill Lynch, Fortescue<\/span> is likely to have surplus port capacity by the end of this year, this due to the installation of a second ship loader and third loading berth. This presents an opportunity to truck additional material from site or via third parties. This will allow Fortescue<\/span> to bypass the current train unloader bottleneck, which suggests potential additional throughput of several million tonnes<\/span>.<\/p>\n

\n\tThe September quarter also saw Fortescue's<\/span> capital commitments for the planned expansion to output of 155 million tonnes<\/span> per year increase by a little more than 50% to US$4.3 billion. Macquarie expects total capex<\/span> for the rest of FY12<\/span> of around US$4.6 billion, offset by operating cash flow for the year of around US$3.6 billion.<\/p>\n

\n\tFor Macquarie this means Fortescue<\/span> won't need to raise debt in the shorter-term for the next stage of the expansion process. An amount in the order of US$5.2 billion will be spent on capex<\/span> in FY13<\/span> on the broker's estimates. <\/p>\n

\n\tGoldman Sachs noting the project expansion budget of US$8.4 billion overall remains essentially unchanged, with financing for US$1.0-US<\/span>$1.5 billion of this budget expected to be finalised<\/span> by the end of the year.<\/p>\n

\n\tAs RBS<\/span> Australia points out, the market at present is placing a large discount on Fortescue's<\/span> expansion plans. This presents an opportunity, as the project moving from concept to reality over the next 12-18 months should see this discount unwind.<\/p>\n

\n\tWhile a weak macro environment presents some headwinds<\/span> there remains value in Fortescue<\/span> at current levels, suggest stockbrokers. This view is backed up by a perfect 8-for-8 Buy ratings among brokers in the FNArena<\/span> database. Goldman Sachs is not in the database but also rates Fortescue<\/span> as a Buy.<\/p>\n

\n\tUBS explains the value argument clearly, pointing out on its forecasts Fortescue<\/span> is trading on an earnings multiple of 6.0 times in FY13<\/span> and at a 35% discount to net present value. The positive views of brokers also reflect Fortescue's<\/span> very high leverage to iron ore demand, as well as improving bond market conditions that should assist in sourcing needed funds for expansion. <\/p>\n

\n\tThe consensus price target according to the FNArena<\/span> database stands at $7.76, with targets ranging from $7.25 for BA-ML to $9.00 for JP Morgan.<\/p>\n

\n\tShares in Fortescue<\/span> today are weaker in a generally weak market. As at 11.25am<\/span> the stock was down 42c<\/span> at $4.69. This compares to a trading range over the past 12 months of $3.95 to $7.34, the current share price implying upside of better than 60% to the consensus price target in the FNArena<\/span> database.<\/p>\n

\n\t <\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"