The Fortescue Metals Group Limited (ASX: FMG) share price is down after reporting its FY22 half-year result which showed a significant cut to the dividend.
Fortescue is one of the world’s biggest iron ore miners. It is also a growing presence in the green energy space.
Fortescue HY22 report
The iron ore mining giant revealed the following financial numbers:
- Average revenue per dry metric tonne (dmt) down 16% to US$95.58
- Total revenue down 13% to US$8.13 billion
- C1 costs per wet metric tonne worsened by 20% to US$15.28
- Underlying EBITDA dropped 28% to US$4.76 billion
- Net profit after tax (NPAT) down 32% to $2.78 billion
- Dividend down 41% to $0.86 per share
There is a lot to unpack there.
As I considered in the earnings preview, Fortescue’s annual financial performance is highly dependent on movements in commodity prices.
Higher prices mostly fall to the bottom line for miners, after paying their dues to the government.
But the reverse is also true. When prices drop, it comes off the profit.
Not only that but the decline is amplified given Fortescue’s low-grade iron ore output.
Costs were also higher because of key input costs increases, including diesel, other consumables and labour rates.
The one thing that Fortescue can control the most – its production – saw growth. The amount of iron ore shipped was 93.1 million tonnes, up 3%.
Fortescue dividend and balance sheet
In addition to earnings, cash flow also sank. Net operating cash flow fell 52% to US$2.14 billion. Free cash flow plunged 74% to US$648 million.
The business’ total debt increased 9% to US$4.6 billion, whilst the company saw net debt reach US$1.7 billion (down from a net cash position of US$2.68 billion).
Fortescue’s interim dividend fell to $0.86 per share. Part of the fall was a reduction of the payout ratio from 80% to 70%.
At the current Fortescue share price, the half-year dividend alone represents a yield of almost 6% including franking credits.
Fortescue Future Industries
Fortescue Future Industries (FFI) is looking to take global leadership in green energy and green technology to decarbonise hard-to-decarbonise sectors.
I think FFI will have a growing influence on the Fortescue share price in the coming years.
It wants to create a global portfolio of green energy projects to supply 15 million tonnes per year of renewable green hydrogen by 2030.
The business has numerous projects on the go, including the green energy manufacturing centre in Queensland. The first stage of development is an electrolyser manufacturing facility with an initial capacity of two gigawatts per year with an investment of up to US$83 million.
It also bought Williams Advanced Engineering because of its expertise in high-performance battery systems. This will help decarbonise Fortescue’s iron ore operations.
FY22 guidance
Fortescue has guided that iron ore shipments will be between 180mt to 185mt for FY22.
The C1 cost is expected to be between US$15 per wmt to US$15.50 per wmt.
Capital expenditure, excluding FFI, is expected to be between US$3 billion to US$3.4 billion
My thought on the Fortescue share price and result
The drop in revenue, profit and dividend can’t be too much of a surprise after the decline of the commodity price in the first half. If the iron ore price holds up at around US$150 per tonne then it could lead to a useful half-on-half improvement.
As I said yesterday, I’m not looking to buy Fortescue shares at this stage. If the Fortescue share price drops with a theoretical drop of the iron ore price to below US$100 per tonne, then I’d be willing to think about it.
However, I’m more optimistic about FFI and the progress it’s making towards decarbonising the world’s heavy industry.
That’s the main reason why I like Fortescue, more than BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), but only at the right price.
