##{"id":62039,"date":"2013-06-21T12:16:26","date_gmt":"2013-06-21T02:16:26","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2013\/06\/21\/fortescue-downgrade-masks-the-positives\/"},"modified":"2013-06-21T12:16:26","modified_gmt":"2013-06-21T02:16:26","slug":"fortescue-downgrade-masks-the-positives","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2013\/06\/21\/fortescue-downgrade-masks-the-positives\/","title":{"rendered":"Fortescue Downgrade Masks the Positives"},"content":{"rendered":"

\n\t– FY13<\/span> shipments slightly weather impacted
\n\t– Cash costs falling
\n\t– Delay to The Pilbara<\/span> Infrastructure equity sale no drama
\n\t– Brokers upbeat<\/strong><\/p>\n

\n\t
\n\tBy Greg Peel<\/p>\n

\n\tIt’s a long held adage that if you’re going to announce to the market your production has fallen behind guidance, it’s best not to do it on the day the Fed announces a wind-back of QE3<\/span> and an independent estimate of Chinese manufacturing suggests contraction. But such is life.<\/p>\n

\n\tIt’s hard to gauge<\/span> in isolation just how the market might have responded to the update from Fortecue<\/span> Metals ((FMG<\/span>)) management yesterday given nothing was going to prevent the general carnage, not even a big jump in the iron ore price. But if we remove ourselves from the reality of the current rout for a moment we find that FMG’s<\/span> update was really quite positive, and well received by analysts.<\/p>\n

\n\tThe production downgrade amounted to a shift in FY13<\/span> guidance from an 82-84mt<\/span> range of shipments to an 80-82mt<\/span> range. Not exactly devastating, and all to do with the weather. Macquarie is ready for a lot more weather-related downgrades in the upcoming quarterly report season for the miners.<\/p>\n

\n\tThere was also some disappointment FMG<\/span> is yet to find a buyer for a minority stake in its rail and port assets, which it calls The Pilbara<\/span> Infrastructure or TPI<\/span>. Given the volatility of iron ore prices the market would like to see the company reduce its gearing from a current lofty 66%, and a sale of 30-40% could net around US$3-4bn<\/span> and reduce gearing immediately to 55% and make the end-FY14<\/span> target of below 40% quite viable.<\/p>\n

\n\tBut after spending years pouring vast sums into ramping up production at a rapid clip, FMG<\/span> will turn cash flow positive by the end of the month. Cash on hand should increase to $1.7-2bn from $1.5bn by June 30 on Citi’s<\/span> estimates. Thus a failure to sell a piece of TPI<\/span> will not affect the company’s capacity to keep funding the expansion, and TPI<\/span> is expected to sell equity in TPI<\/span> in the September quarter. It’s a delay on previous guidance but as JP Morgan points out, recent stronger iron ore prices have offset any urgency and FMG<\/span> need only sell if the terms are desirable.<\/p>\n

\n\tMeanwhile, cash costs are likely to come in at the bottom of the US$45-50\/t range which pleasantly surprises JP Morgan and comfortably beats (to the downside) Macquarie’s expectations. Falling costs reflect FMG’s<\/span> growing scale, says Macquarie, and lower cost tonnes<\/span> coming in from Solomon.<\/p>\n

\n\tCIMB<\/span> notes that even with the shipment downgrade, shipments in FY13<\/span> will be up 40% on FY12<\/span>. Guidance for FY14<\/span> has also now been provided at 127-133mt<\/span>, which while matching the long held target still surprises some brokers to the upside. Capex<\/span> in FY14<\/span> will only be US$1.9bn, down from US$6.3bn in FY13<\/span>.<\/p>\n

\n\tThen there’s the currency. Citi<\/span> is forecasting free flow cash generation in FY14<\/span> of US$700m<\/span> but were the analysts to mark both the iron ore price and the AUD to spot, that would rise to US$1bn<\/span>. Looking at it another way, UBS still has an Aussie input of 104 in estimating an FY14<\/span> cash cost of US$44\/t, but at 93 that would fall to US$40\/t.<\/p>\n

\n\tThus if we ignore the macro picture at present, and market volatility, yesterday’s update from Fortescue<\/span> was a positive one. There’s been a slight trimming of the consensus target on the lower near-term production but outer year earnings forecast have received a boost. The target falls to $4.60 from $4.75 but there have been no changes to ratings in the FNArena<\/span> database.<\/p>\n

\n\tDeutsche Bank had called the stock price fairly valued before this week, and remains on Hold. UBS has always taken a conservative stance on FMG’s<\/span> ambitious ramp-up target, and is on Neutral. Otherwise it’s Buy or equivalent ratings across the board. Macquarie is currently advising Fortescue<\/span> and is thus restricted from offering a recommendation but today published an upbeat report.<\/p>\n

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