The Fortescue Metals Group Limited (ASX: FMG) share price could shoot higher following the release of its half-year profit result.
Here are the key takeaways from Fortescue's half-year report:
- Revenue rose 34% to $US 4.5 billion
- Profit rose 283% to $US 1.2 billion
- An interim fully franked dividend of 20 cents per share was declared
- Operating costs averaged $US 13.06 per tonne of iron ore
During the half year, Fortescue shipped 86.1 million tonnes of iron ore. That would put it slightly ahead of its 2017 financial year guidance of between 165 million tonnes and 170 million tonnes.
Pleasingly, in the second quarter of this half, Fortescue's cash costs (the costs incurred at the mine level) fell to just $US 12.54 per tonne. Once we include all costs to get the ore to China, the per tonne cost rises to $US22. That's pretty impressive. And when you consider it sells its ore for $US 56 per tonne, the margin is very lucrative.
"Our team has continued their unwavering focus on delivery against safety, productivity and cost reduction targets. We achieved further improvement in our C1 costs to US$13.06/wmt and shipped 86.1 million tonnes for the half year, slightly ahead of our targets," CEO Nev Power said. "Our successful operational performance combined with positive market conditions produced strong cash flows facilitating further debt repayments of US$1.7 billion."
Fortescue's debt was $US 5.1 billion at 31 December 2016, with cash at $US 1.16 billion. Net debt (total debt minus cash) dropped from $US 5.2 billion to $US 4 billion. Around $US 2 billion of debt is due in 2019.
Should you buy Fortescue shares?
Fortescue has enjoyed a 260% run-up in share price over the past 12 months. In fact, in January 2016 Fortescue Metal shares were trading for just $1.56 — that means today's half year dividend would be a 12.5% fully franked yield!
However, over the same period the market price for iron ore rose from around $US40 per tonne to $US80 per tonne, a rise really no-one was expecting. Fortescue has no control over the market price.
Looking ahead, Fortescue anticipates up to 170 million tonnes in full-year shipments with an average cost between $US 12 and $US 13 per tonne.
In my opinion, Fortescue shares could go on to shoot the lights out in the remainder of 2017 but make no mistake, it is a high-risk investment.
