FMG share price: what’s the outlook following Iron Bridge update?

‘In consideration of iron ore increments from Australia and Brazil in the near future, iron ore price rebound room may be limited.'

Iron ore prices: macro view

Despite its stock being down 10% since January, over the last two years Fortescue Metals Group (ticker: FMG) has been one of the best performing large-caps on the ASX.

This comes as iron ore prices have continued to rise, with the all-important commodity last trading above the US$200 per tonne mark.

Industry data shows us that iron ore stockpiles continue to grow in china, though over the last week steel inventories have fallen.

According to the May 31 Metals Market Index (MMI) Daily Iron Ore Index Report iron ore inventories at Chinese ports rose 0.78% to 119.44 million tonnes, while steel inventories dipped, falling 0.51% to 16.69 million tonnes.

Here’s some of the key market commentary from the MMI Report:

'Downstream demands remained strong given last week's transaction volumes of steel products and thus, steel mills hold positive producing enthusiasms. According to SMM, steel mills' profits recently warmed up again and their demands pushed up iron ore prices.

'Besides, it is reported the production control in Tangshan is expected to relax from 30%-50% to 30%, which will offer certain supports to iron ore prices as well. However, in consideration of iron ore increments from Australia and Brazil in the near future, iron ore price rebound room may be limited.'

FMG share price: beyond the macro

Taking a more granular view, FMG announced last week that it has completed the technical and commercial assessment for its Iron Bridge project.

Here the miner highlighted that the Iron Bridge Magnetite project is expected to deliver 22 million tonnes of 67% FE magnetite concentrate on an annual basis. This, said management, will help the miner diversify its product line-up. FMG has historically focused on the production of lower grade iron ore.

First production is expected in December 2022 – representing a 6 month delay on the previous expected start date.

As part of this market update, FMG also revised its CAPEX estimations, saying they were now expected to come in at between US$3.3-3.5 billion. The project was initially forecast to cost US$2.6 billion.

Off the back of this update Goldman reframed their Sell rating on FMG, saying there remained execution risks associated with Iron Bridge, while also noting there has been a 'Widening of low grade 58% Fe product realisations.'

Goldman additionally honed in on the widening valuation gap between FMG and its big three mining peers BHP Group (ticker: BHP) and Rio Tinto (ticker: RIO).

Here Goldman analysts noted that while BHP and RIO are currently trading on FY23 earnings (EBITDA) multiple of approximately 5x, FMG currently trades on a ~9x FY23 EBITDA multiple. For reference, the investment bank expects iron ore prices to trade at between US$80-90 per tonne in fiscal 2023 – implying a steep declines from current price levels.

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