The Fortescue Metals Group Limited (ASX: FMG) share price is up slightly today at $4.95 and has already cracked the $5 mark today.
Is the next stop $6?
It's almost hard to believe that the share price was at a five-year low of $1.44 as recently as January 2016 – which was the lowest level since the depths of the GFC.
But a combination of much lower production costs, a recovery in the iron ore price, and ongoing debt repayments has Fortescue sitting pretty currently.
Production costs
In the 2014 financial year, C1 production costs were US$34 per wet metric tonne (WMT). That was down 23% over the previous year. Total delivered cost was US$52/wmt.
In 2015, C1 cash costs were down another 21% to US$27/wmt.
In the 2016 financial year, C1 cash costs dropped 43% to US$15.43/wmt and Fortescue's cash costs now rival those of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) – the lowest cost producers in the world. Total delivered costs were US$23/wmt in FY16.
Iron ore price
The iron ore price averaged US$96 a tonne in 2014, dropping to US$55 a tonne in 2015. The current spot price is around US$58 a tonne, but it did briefly dip below US$40 a tonne in December 2015.
Fortescue saw an average realised price of US$45.36/dry metric tonne – around 88% of the average benchmark price, indicating the company still gets a discount price for its ore.
Debt
In FY 2014, Fortescue had repaid US$3.1 billion of its debt and had committed to a further US$0.5 billion. That had saved the miner more than US$330 million in interest costs a year. By the end of the 2015 financial year, Fortescue had repaid US$4.1 billion.
By the end of FY2016, net debt was down to US$5.2 billion – including $1.6 billion in cash, and Fortescue announced last week that it was repaying US$700 million of a 2019 term loan.
Outlook
Fortescue expects to ship between 165 and 170 million tonnes of iron ore in the 2017 financial year at an average C1 cost of US$12 to US$13/wmt. The company is still awaiting the delivery of a number of very large ore carriers (VLOC), which could see the company further cut its delivered cash costs.
To see its share price hit $6, Fortescue will likely need to increase its earnings per share – as it is currently trading on a P/E ratio of around 11x. That's not expensive, but the market is unlikely to rate the company higher in the short-term.
