Update: Fortescue Metals Earnings

Aug.21.14 | About: Fortescue Metals (FSUMF)


Fortescue Metals reports excellent earnings and is trading at a P/E of just 5.

Nothing unexpected here, but 2015 will be a difficult year for Fortescue as a huge tax bill is waiting, as well as lower revenues because of pre-paid ore deliveries.

2015 should be the last difficult year, and Fortescue should make quite a lot of free cash from next year on, so the investment thesis is still valid.

Fortescue Metals (OTCPK:FSUMF), one of the world's largest iron ore miners, has reported the financial results for its financial year 2014 (which ended in June of this year). The company reported a total revenue of $11.7B and an EBITDA of $5.6B which resulted in a net profit of $2.74B or $0.88/share. This is quite good considering 'only' 124 million tonnes of iron ore were shipped which is approximately 20% lower than the lower part guidance for this year (155-160M wmt). It's important to emphasize that Fortescue's C1 cash costs per tonne of iron ore have dropped by a stunning 23% to $34/wmt and this drop in costs has allowed Fortescue to remain very profitable even though the iron ore price hasn't really been cooperating, lately.

The free cash flow in FY 2014 was an amazing $4B which was primarily used to reduce the company's debt burden (net debt was $7.2B as of at the end of June) and to pay a dividend to the shareholders of the company (with $0.185/share being paid for the year). Now the majority of the capital expenditures has been spent and as the company can now really produce 155-160M tonnes per year, the company is taking debt reduction very serious. In an earlier update I described that Fortescue planned to repurchase $0.5B worth of notes this fall, and the company expects to repay another $2-2.5B in debt over the next 18-24 months.

Based on the current iron ore price, shipping costs, capex guidance and the characteristics of Fortescue's end-product, I expect Fortescue to generate $2B in free cash flow this year which should cover the dividend and further net debt reduction. The free cash flow will be lower than anticipated, as Fortescue will be delivering over $750M worth of pre-paid ore. So even though revenues will be reported, the cash flow statement will look worse than it is. Additionally - and this was hidden in the annual report - Fortescue expects a $666M tax bill in December of this year which will further reduce the company's cash position. However, 2015 seems to be the final 'difficult' year for Fortescue and I'm aiming for a free cash flow of $2.5B from next year on, at the current iron ore price which will allow for a dividend increase.

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