Fortescue's $6 billion revenue hole

Company News

by Glenn Dyer

What Twiggy Forrest’s Fortescue Metals Group (ASX:FMG) didn’t tell you in its June quarter and 2021-22 production report on Thursday was the $US6 billion hole in its annual revenue line.

The June quarter production did reveal record iron ore exports in the June quarter – 49.5 million tonnes, up just from 49.3 million tonnes a year ago and for the financial year – 189 million tonnes, up 3.7% from the 182.2 million the year before.

Both were records and Fortescue is pushing for a 4th record annual tonnage in 2022-23 of 192 million tonnes as its Eliwana and Iron Bridge mines (the latter a lower quality higher cost magnetite mine, the former a higher-grade hematite mine) ramp up output

That data was all in the report along with an upbeat tone to the commentary.

The all-important pricing details for the quarter and the year to June were also revealed (that’s how much a tonne Fortescue gets for its iron ore), but the comparison was inadequate and should have been with pricing from the previous financial year – 2020-21.

It wasn’t. You can ask why and perhaps the answer might be that the comparison is invidious because 2020-21 was the year of record iron ore prices and that meant record revenues and net profits for FMG – $US22.3 billion and $US10.3 billion respectively, along with a record full year dividend of $A3.58 per share.

Those were the days and when you examine the pricing for the June, 2022 year against 2020-21, revenue will be down $US6 billion or more which will mean lower earnings and lower dividends in 2022-23.

The outlook for 2022-23 is for another fall given the gloom and doom around the iron ore industry’s outlook. That’s despite a 20% jump in iron ore prices in the back half of July.

FMG’s pricing is based on as a percentage of the Platts Index, an index pricing system run by S&P Global for 62% Fe fines on a cfr basis (which means the shipper, in this case, Fortescue, controls all the shipping costs and therefore the timing of the ship movements).

62% Fe fines is the most traded iron ore product globally with the price set by interaction of Chinese buyers and the big three Australian miners, Fortescue, Rio Tinto and BHP and Vale of Brazil.

The pricing details in Fortescue’s quarterly report are keenly watched because Twiggy’s company which sells a slightly lower quality iron ore product (58% to 59% Fe so it always gets a percentage of the index not the full price).

The June quarter, 2022 report revealed that Fortescue’s average revenue of US$108/dry metric tonne (dmt) for the quarter, realising 78% of the average Platts 62% CFR Index and average revenue of US$100/dmt for the 2021-22 year. That means the full index price was 22% higher than FMG’s $US108 a tonne.

That sound all OK – revenue a little better in the final quarter than the year average – that reflects weaker prices over most of the year (down to $US87 a tonne last November and a bit higher in the June half year)

But go to the June 2021 report from Fortescue and it’s a very different story.

The June 2021 quarter saw “Record average revenue” of US$168/a dry metric tonne (dmt) for the quarter, realising 84% of the average Platts 62% CFR Index, and an average price of US$135/dmt for FY21. FMG’s price was just 16% short of the full index price.

So the June 2022 average price was actually a fall of more than 35% – that will leave a hole in the accounts – on a 200,000 tonne rise in exports for the three months to 49.5 million tonnes, it is in fact a drop of $US2.4 billion or more in revenue for the quarter.

For the year, the fall from $US135 a tonne to $100 a tonne was 26% with the amount shipped rising 6.8 million tonnes, which will be a small offset to the bigger drop. That’s a fall in revenue of more than $US6 billion and it comes despite the confidence for the coming year – as shown by the forecast rise of three million tonnes in shipments (which could be just $US300 million extra).

Fortescue – like BHP, Rio Tinto and Vale – is looking at another slide in revenue and profits this year as the Chinese economy stutters along and the rest of the global economy is battered by inflation, high interest rates and whatever else is thrown at it.

Attempts to help the battered Chinese property sector might help prices and rising steel product prices in China have helped boost prices in July, as has a 20 million tonne drop from Vale in its estimated iron ore exports for the full year.

…………

Vale’s weak June quarter results gives us an idea of how Fortescue’s profits will look when they are released next month.

The Brazilian mining giant said its second-quarter net income fell 19% from the previous year, hit mainly by a sharp decline in iron ore prices and escalating costs (it has nickel and copper revenues and earnings as well as the iron ore returns).

Vale posted net income of $US6.15 billion, above expectations of $US2.837 billion, according to markets forecast.

Recurring net income, however, fell 49.8% from the year before.

Vale said net operating revenue fell 32% from a year earlier while expenses rose 8% in the same period.

In the three months ended to June 30, Vale averaged $US113.3 a tonne for its iron ore, down from the $US184.8 a tonne in the same period of 2021.

(Vale sells a lot of higher grade 65% fines to China and other markets which are worth more than the 62% fines from the Pilbara. That’s because Vale’s reserves in its northern mining system are of higher quality.)

Vale said revenue for the quarter tumbled 30% to $US11.159 billion from $US16.514 billion. For the First half of 2022, the fall was more than 25% – from $US29.06 billion to $US21.97 billion.

Discounting assets sold during the half, the company said net profit for the half dipped to $US10.609 billion from $US13.132 billion.

The company said it produced 74.1 million tonnes of iron ore (after allowing for the sale of its midwest mines), up 17% from the first quarter but 1.2% lower than the 75 million tonnes the year before.

For the six months to June, total production was 137.236 million tonnes, down 3.7% from the first half of 2021 when 142.531 million tonnes was produced.

Sales showed a similar performance – 64.65 million tonnes in the June quarter – down 2.3% from a year earlier but up 23% from the first quarter of this year.

For the first half of 2022, sales totalled 116.66 million tonnes, 5.8% lower than the 124 million tonnes shipped in the first six months of 2021.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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