Fortescue Metals Group: Cautious Outlook

FMG's iron ore production in the third quarter of FY2024 was 46.6 million tonnes, a 15% decline from the previous quarter and an 8% decrease compared to the same period last year. Iron ore shipments amounted to 43.3 million tonnes, a 6% drop year-on-year. This decline was primarily due to a train derailment on December 30, 2023, and weather-related disruptions. However, it is noteworthy that March shipments reached 18.7 million tonnes, setting a record for monthly shipments, though still below market expectations.

In the third quarter of FY2024, the Pilbara hematite C1 cost was USD 18.93 per wet metric tonne, up 7% from the previous quarter, mainly due to lower sales volumes. For the nine months ending March 31, 2024, the average C1 cost was USD 18.13 per wet metric tonne. The FY2024 guidance for Pilbara hematite C1 cost remains between USD 18.00 and USD 19.00 per wet metric tonne, based on an assumed AUD/USD exchange rate of 0.68.

Fortescue Metals Group (FMG) needs a strong fourth quarter to achieve its annual iron ore shipment target of 192 to 197 million tonnes. However, this target appears challenging to meet. Following the disruptions caused by the train derailment and adverse weather in the third quarter of this fiscal year, FMG is expected to hit the lower end of its guidance range, implying a minimum fourth-quarter output of 52 million tonnes. The mild iron ore recovery in April is unsustainable. Further macroeconomic pressures, high supply and inventory levels, and reduced spot purchases could pressure the entire Chinese steel market, and China's demand is the most significant variable.

Fortescue Metals Group (FMG) has revised its FY2024 capital expenditure (capex) guidance. Metals capex has been reduced by USD 300 million to USD 500 million, now expected to be between USD 2.5 billion and USD 2.7 billion. Similarly, energy capex has been reduced by USD 100 million to USD 700 million. The company attributes these cuts to a weaker Australian dollar and adjusted spending timelines. The reduced capex and lower-than-expected net debt position FMG to deliver strong dividend payments in the second half of FY2024, with an anticipated payout ratio of 70%. However, the Iron Bridge project faces delays due to the need to replace sections of the pipeline with manufacturing defects.