Fortescue's race to 2014

Will the company generate enough cash to meet its debt obligations?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 23, 2012 6:22 pm AEST

Iron ore miner, Fortescue Metals Group Limited (ASX: FMG) has today reported a full year net profit after tax of US$1.6 billion, on record revenues of US$6.7 billion. That result is 53% higher than last years'. The company declared a 4 cent fully franked dividend, taking the full year dividend to 8 cents.

Fortescue increased ore mined by 46% to more than 60 million tonnes, and its expansion programs continue to advance to meet the company's target of 155 million tonnes per annum by the end of June 2013.

The increase in iron ore sold was partly offset by a 12% fall in average realised selling prices. The company achieved US$120 per tonne in 2012. The next financial year is likely to see another decline with iron ore prices having fallen to as low as US$104 per tonne recently.

Cash flows from operations were exceptionally strong at US$2.8 billion, and the company will need to continue to pump out that level of cash flow to meet its debt obligations. The Fortescue has more than US$8.5 billion of debt as at the end of June 2012, and incurred interest expenses of $716m in the last financial year.

Additionally, Fortescue has calculated that it could be liable for up to US$3.5 billion of taxes under the Minerals Resource Rent Tax (MRRT), but the amount has not been recognised in the financial statements this year.

The MRRT applies to profits made on iron ore and coal projects in Australia. Both Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have recognised amounts on their financial statements at their most recent results.

Fortescue may also be affected by BHP's decision to not proceed with the $20 billion Port Hedland outer harbour project, which was designed to allow much higher volumes of iron ore to be shipped overseas. Fortescue shares the existing inner harbour with Gina Rinehart's Hancock Prospecting, BHP and the North West Iron Ore Association members Atlas Iron Limited (ASX: AGO), Brockman Resources and FerrAus Limited.

The Foolish bottom line

As I've mentioned before, Fortescue is in a race to sell as much iron ore as it can, at the highest prices it can before the company's debt matures – with the first chunk of debt due in 2014. With falling iron ore prices, and large volumes of production coming onstream (which could further force prices down), the finish could be nail-biting.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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