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FMG share price: what’s the outlook after ‘record’ quarterly results?

We examine the key things investors need to know about FMG’s latest Quarterly Production Report.

FMG results in focus Source: Bloomberg

FMG share price: a comeback story

Today's ‘strong’ Quarterly Production Report underscores just how transformative the last couple of years have been for Fortescue Metals Group (ASX: FMG).

In the last six months alone the pure-play miner has seen its share price run-up ~40%. In the last 12-months: the stock has more than doubled.

Though iron ore prices proved volatilite – both up and down in 2019 – they have found some stability – currently hovering a little above the US$90 per tonne mark. Some have even suggested that we may be heading back above the US$100 per tonne mark.

Indeed, the last year has proven to be a dramatic shift in fortunes for FMG, especially when taking a longer-term perspective. In February 2009, when FMG traded around the $2 mark, Proactive Investors ran a story noting that Hunan Valin – a Chinese steel maker – had, ‘agreed to pay A$1.2bn (US$770m) for a 16.5 percent stake in debt-strapped Australian mining company Fortescue Metals Group (ASX:FMG).’

The FMG share price (ASX: FMG) now trades well ahead of those lows, currently at $11.20, on a market capitalisation of $35.5 billion and is no longer ‘debt-strapped’.

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Record production results in focus

Looking at today’s Quarterly Production Report, FMG revealed that costs came in lower, average realised revenues were higher and shipments rose impressively during the December quarter.

Centrally, Fortescue reported shipments of 46.4 million tonnes during Q2 FY20, representing a 9% increase on the corresponding FY19 period. Total shipments for the first-half have now reached a ‘record’ 88.6 million tonnes.

Yet maybe most impressively, FMG recorded strong price realisation for the quarter, reporting average Q2 FY20 revenues of US$76 per dry metric tonne. This represents a 58% increase in realised average revenues – when compared to Q2 FY19.

Better still, while revenues rose, costs fell. Here the company reported C1 costs of US$12.54 per wet metric tonne – down 3% on a quarter over quarter basis. This, noted FMG, was a result of 'strong mining and processing performance and sustained cost management.'

Off the back of these results, Fortescue’s esteemed CEO – Elizabeth Gaines – commented that:

'Once again, the Fortescue team has achieved outstanding results demonstrated by multiple records across the operations [...] while maintaining our industry leading cost position.'

Moreover and in response to today’s ‘strong result’, RBC Capital Market’s analysts noted:

‘The result serves to highlight the leverage of the stock to the iron ore price. ‘

And though RBC noted that they expected iron ore prices to decline in the second-half of CY20, ‘in the interim we expect the stock will remain an attractive proposition for those investors seeking iron ore exposure.’

An improved outlook

As part of today’s quarterly results – Fortescue also upgraded its full-year guidance, specifically as it relates to its cost and shipments outlook.

Here, FMG now expects shipments in the upper end of the previously guided 170 to 175 million tonne range. Moreover, costs are now also expected to come in lower than expected, with C1 costs (direct costs) expected in the range of 'US$12.75 - US$13.23/wmt.'

In the first quarter Fortescue had guided for C1 costs of between 'US$13.25 - 13.75/wmt.'

No further commentary on dividends were given in today’s quarterly, though the company explicated its current dividend policy in Q1, noting a 'total dividend pay-out ratio between 50 and 80 per cent of full year net profit after tax.'

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