Alleron comment in Australian Financial Review (AFR) article

Alleron comment in AFR: “FMG can provide growth and strong returns: CEO Nev Power”

21 Aug 2017

By Tess Ingram from Australian Financial Review

Fortescue Metals Group’s strengthened balance sheet can sustain higher dividends and still support the iron ore miner’s growth ambitions, chief executive Nev Power says.

The Perth-based iron ore miner’s bullish outlook comes after net profit more than doubled in 2016-17 to $US2.1 billion, from $US985 million a year earlier.

It is the company’s best result since 2014, when the average headline iron ore price was almost double what is was during fiscal 2017.

But Fortescue was aided by bigger volumes than three years ago, shipping 170.4 million tonnes.

Underlying earnings were 48 per cent higher than a year earlier at $US4.7 billion, thanks to lower operating costs and a year-on-year improvement in iron ore prices. Revenue rose 19 per cent to $US8.4 billion.

The results, which largely met analysts’ expectations, allowed the miner to declare a final fully franked dividend of 25¢ a share, up from 12¢ last year, and delivers the company’s chairman and largest shareholder, Andrew Forrest, a $260 million pay day.

The total annual dividend of 45¢ per share was 200 per cent higher than the 15¢ returned to shareholders in 2016 and was significantly stronger than the consensus forecast for 39¢, according to Bloomberg.

Mr Power said the robust dividend reflected the company’s confidence in the market and strong balance sheet, after it slashed net debt by half to $US2.6 billion at the end of June, from $US5.2 billion a year earlier. The miner continued its debt-reduction drive during the year with $US2.7 billion in debt repayments.

Dividends could climb further
While reducing debt remains the priority, Mr Power said he was confident the miner could direct more of its cash to returns and growth.

Fortescue is increasing its dividend payout ratio to 50-80 per cent of net profit, from its previous policy of 30-40 per cent. Its payout for 2017 came in at 52 per cent.

“I think the balance sheet well and truly has the capacity to do both of those things,” Mr Power said.

“It is very much about shareholders benefiting from an increase in iron ore prices because we want our shareholders to have returns that reflect the market conditions and that’s the beauty of having a payout ratio.”

As well as planning to spend more on its iron ore business this year and mulling a replacement option for its Firetail mine, Mr Power said Fortescue had increased its focus on growth during the past six months as it developed “the opportunity and the capability to start looking at those things more seriously”.

“It is not so much driven by the financial performance of the company but rather by the overall performance of the company – that we have put in place a lot of the things that have underpinned the future of our iron ore business, we have established those and that has allowed us more capacity to look at potential growth options,” he said.

Fortescue has said it plans to pursue early-stage growth options where it can use its skills as a project developer. It is interested in diversifying its commodity exposure and is already progressing opportunities in copper-gold in South Australia, NSW and Ecuador.

Mr Power said that during the next five years he expected Fortescue to grow while sustaining strong returns.

“It means we need to be a lot more considered than just being driven by growth per se but I believe we can be a high-shareholder-returns company and pursue growth in value at the same time.”

Balance sheet stable
Shares in Fortescue closed 6.4 per cent higher on Monday at $5.85 per share.

UBS analyst Glyn Lawcock said where Fortescue’s dividends would fall in 2018 within its new, wider payout ratio would be determined probably by how the iron ore price and discount on lower-grade iron ore tracked during the next six months.

The discount has persisted above historical levels for the past six months and while Fortescue is adamant it will correct, Mr Lawcock said “the jury was out” on whether the spread in prices would close.

The uncertainty around pricing for the next 12 months is also weighing on analysts’ expectations for Fortescue’s performance this year, with concerns a fall in realised prices could coincide with less-dramatic cost reduction and squeeze Fortescue’s margins. The consensus net profit forecast for 2018 is just $US1.3 billion.

“I think this result is repeatable but you would need the current environment to be sustained,” Mr Lawcock said, pointing to headwinds in the rising Australian dollar and expected decline in prices.

Fortescue shareholder, Alleron Investment Management chief investment officer Sean Sequeira, said regardless, he was comfortable the company had “built a base such that it can withstand such falls [in the iron ore price] and it is in a very good position going forward”.

“They have got their cash costs down and with the excess cash flow they are rewarding shareholders, which is exactly what we hoped they would do,” Mr Sequeira said.

Dr David Gallagher appointed to Alleron Portfolio Risk & Process Committee.

Leave a Reply

Your email address will not be published.