Fortescue profit fall drives dividend, payout ratio slump

Australia’s premier iron ore miner, Fortescue Metals Group (ASX:FMG) has posted its interim result, for the December 2021 half, with an underlying net profit of US$2.78 billion, which was a touch above an expected $2.70 billion. Here are the highlights:

• Total revenue of US$8.1 billion, down 13% (H1 FY22 US$9.3 billion)
• Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of US$4.76 billion, down 28% (H1 FY21 US$6.64 billion)
• Underlying net profit after tax (NPAT) of US$2.8 billion, down 32% (H1 FY21 US$4.08 billion)
• Earnings per share (EPS) of US 90 cents, down 32% (H1 FY21 US$1.33 per share)
• Fully-franked interim dividend of 86 Australian cents per share, 70% of H1 FY22 NPAT dividend payout

The 32 per cent slide in profit, from US$4.08 billion a year earlier, came as costs for labour, fuel and shipping all rose.

The result was fairly close to analyst expectations, given that the market had factored-in weaker iron ore prices received by Fortescue. The miner copped stiffer penalties than normal for the fact that its ore is lower-grade than its peers; Fortescue received 70 per cent of the benchmark iron ore price over the past six months down from 90 per cent in the final six months of the 2020 calendar year.

China’s push to “go green,” combined with trade tensions and debt-laden property sector deep in trouble, is not helping the outlook for iron ore, and nor is Beijing’s crackdown on “speculation and hoarding” in the iron ore markets. Iron ore is up 60% since mid-November, and that’s not in China’s plan – the authorities want it lower, to the extent that they can influence it. 

Fortescue shipped a record 93.1 million tonnes of ore in the half, with its half-year shipments up 3 per cent compared to the equivalent half of 2020. But with the steeper discounts, Fortescue received an average $US96 a dry metric tonne for its iron ore, down from an average of $US114 a tonne a year ago. That flowed into the earnings fall.

Wednesday’s dividend was equivalent to 70 per cent of half-year earnings, whereas the company paid out 80 per cent of earnings at the same time last year.

Fortescue paid an 86 (Australian) cents interim dividend, down 41% on the record $1.47 interim dividend announced a year ago. That slashed the payout to founder and major shareholder Andrew “Twiggy” Forrest – or more accurately, to the Minderoo Foundation of Forrest and his wife Nicola – from $1.64 billion last year (remember, just the interim) to about $970 million.

The iron ore miner provided guidance for FY22:

• Iron ore shipments of 180 million to 185 million tonnes
• C1 costs of $US15-$US15.50 per wet metric tonne
• Capital expenditure (excluding Fortescue Future Industries, or FFI) of $US3 billion to $US3.4 billion.

FMG shares briefly slid below $21 today, but closed the session down 44 cents, or 2%, to $21.15, well above the analysts’ consensus price target of $17.64 on FN Arena’s collation.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.