FMG share price: what’s the outlook as we close in on 2020?

We examine the year that was as well as the 2020 outlook for Fortescue Metals Group.

FMG share price: 2019 in review

Over the last week, the Fortescue Metals Group (ASX: FMG) share price has gained slighlty more than 2%.

Prior to today’s open, it traded at an all-time high of $11.00 per share.

All up, it also represents one of the best performing and potentially most controversial stocks of 2019.

FMG has after all has risen more than 150% during CY19. Iron ore, by comparison, has risen 32% YTD; though at one point it was some 78% higher, on July 7.

Other top performing ASX stocks for the year include: Avita Medical, Polynovo and EML Payments. (FMG is the next on this illustrious list.)

A steady flow of mostly positively news looks to have buoyed the share price even as the iron ore price has dropped from its July peak of ~US$120 per tonne.

In saying that, the iron ore price has stabilised around the US$75-95 per tonne mark in recent times and FMG has continued to pursue a shareholder friendly agenda.

FMG for example has recently reduced its debt load and refinanced its debt obligations. Such actions, as reported by FMG’s CEO, Elizabeth Gaines 'will reduce annual interest costs, flatten the repayment profile and extend maturities to 2027 while maintaining our balance sheet structure on investment grade terms and conditions.'

The company also announced that it had extended its previously announced share buy-back program to October 10, 2020.

'Fortescue may now buy back up to A$500 million shares during the period.'

Adding to these shareholder friendly actions, the company’s latest Q1 quarterly production results also painted a still optimistic picture: Here, FMG reported a strong start to the 2020 fiscal year, with iron ore shipments coming in at 42.2mt (+5% YoY), average revenue also rose, hitting US$85 per dmt (+89% YoY) and the company again quantified its reduced debt position, reporting US$0.5bn of net debt – as of September 30.

Iron ore prices & the analyst view

For the time being at least, iron ore prices do indeed remain elevated. Yet the outlook for iron ore – from a number of respected sources – is a less-than-positive one.

For example, Westpac economists think iron ore will hit US$65 per tonne by the end of 2020; while NAB is slighlty more positive, believing it will drop to US$68 per tonne by the end of CY20.

Australia’s Department of Industry, Innovation and Science by comparison posits that iron ore prices will fall to US$63 per tonne in CY20. By CY21 they are expect it to hit US$60 per tonne.

For all these forecasts, as well as iron ore’s some 25% decline from its July CY19 peak, FMG’s share price has held up – with it currently trading around all-time highs. Yet, certain investment banks remain sceptical of the outlook.

As we previously wrote:

‘Citibank itself cited the widening disparity between iron ore prices and FMG’s share price action as a potential problem for the pure-play miner. Peaking iron ore prices and peak Chinese steel output potentially further compounds this issue.’

Other issues, such as an expectedly hefty dividend payment, are also likely to put downward pressure on FMG’s share price – thinks Citibank.

Citibank currently has a NEUTRAL rating on Fortescue and a share price target of just $8.50.

Turning to the present and amidst a broader market sell-off today the FMG share price fell – dropping 1.27% by the afternoon – to hit $10.86 per share.

Reflecting on the broader broker consensus for FMG into 2020, the outlook is more bearish than bullish. Specifically, just 19% of analysts believe FMG is a BUY, 42.9% a HOLD and 38.1% a SELL.

The average 12-month analyst price target for FMG currently stands at $8.74. Somewhat ahead of Citi's bearish take.

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