Fortescue Metals Group FY21 earnings preview

With two out of three of Australia’s large-cap iron ore miners – BHP Group and Rio Tinto – having already reported their latest round of earnings, market expectations are likely elevated around Fortescue Metals Group (FMG) upcoming full-year earnings report.

FMG is set to report its full-year, FY21 results next week, expected to be released during the morning on Monday, 30 August.

Below we look at some key macro considerations as well as examine the recent operational results from big three peers BHP and Rio Tinto, and the insights they might give to FMG’s upcoming results.

Iron ore comes under pressure

With the market driven by the short-term whims of investors, stocks like FMG have been battered over the last month, as iron ore itself faces heavy selling pressure.

Prices of the all-important commodity have collapsed since May, falling from a high of around US$230 per tonne to US$160 per tonne in recent days – implying a decline of approximately 30%. Off the back of that, FMG has seen its share price decline steeply, with the stock down ~20% in the last month alone, last trading at $20.13 per share.

Market commentary, dated August 18, from the Metals Market index provides useful insight into the current situation, with it being noted:

'Steel mills are more likely to buy cautiously due to the continuously decreasing iron ore price, and the, overall deal atmosphere was depressed today.’

'Recently important iron ore inventory continued to gradually increase, spot iron ore price still has more pressure to rise. Furthermore, steel price also decreasing due to unforeseeable steel demand, the support effect on iron ore price has gradually decreasing.'

Rio Tinto, BHP results: dividend harbingers

Despite iron ore’s short-term weakness, the commodity has run hot over the last year, boosting the profit and cash flow profiles of Australia’s big three miners in the process.

This was most recently evidenced by Rio Tinto and BHP’s recent interim and full-year results, respectively, which saw both companies hand out mammoth windfalls to investors. BHP for example, returned more than US$15 billion worth of dividends in FY21 alone.

Investors will likely be keen to see Fortescue make comparably significant payouts. The miner most recently paid an interim dividend of 147 cents per share and currently has a dividend yield of 11.51%. This comes as those slumps in the iron ore price have pushed FMG’s share price down, bumping up the dividend yield in the process.

Macquarie, who is particularly bullish on the iron ore and FMG more specifically, has an Outperform rating and $27.00 price target on the miner. The investment bank expects FMG to payout 367 cents per share in total dividends in FY21, up from 176 cents per share in FY20, implying that a significant final dividend looms.