Fortescue Limited (FMG) – Pressed for time

Fortescue Ltd engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. The also focus on producing green energy and green hydrogen, including derivatives comprising green ammonia, as well as green technology development and manufacturing. The company is headquartered in Perth, Australia.

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Most of the key operational data for Fortescue’s (FMG) September quarter had already been disclosed in the performance update in early October. New information contained in the quarterly production report included lower-than-expected hematite C1 unit costs. While the US$21.98 per wet metric tonne (wmt) unit cost for the September quarter was 13% higher than the June quarter and 21% higher than the previous corresponding period due to lower volumes, a spike in diesel prices and general inflation, it was 2% better than consensus expectations.

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On the other hand, FMG revealed that it expects inventory levels to increase by a further 4–5 million tonnes in October (on top of the circa 4 million tonnes of inventory build in the September quarter) as sales slow amid iron ore contract negotiations with the China Mineral Resources Group (CMRG). While FMG maintained its FY27 guidance on production, costs and capital expenditure, this is dependent on how negotiations with CMRG progress. If negotiations are not concluded by the end of 2026, then it may impact on operations. The dividend is also under some pressure, even if CMRG negotiations conclude successfully. On our numbers, which assume negotiations conclude by the end of 2026, FMG will be free cash flow negative in FY27–28, before turning modestly positive in FY29. Should FMG maintain its 65% dividend payout ratio, then debt levels would have to rise, or FMG could conserve cash by shifting towards the lower end of its dividend payout policy of 50–80% of underlying net profit after tax.

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We have made minimal changes as a result of incorporating the September quarter (EPS for FY27 and FY28 move by less than +/- 1%). However, we have taken our longer-term price realisations down, which leads to a reduction in our target price to $17.50 from $19.00. Valuation currently underpins the Accumulate recommendation. Taking a more upbeat view on FMG would require more visibility and confidence that CMRG negotiations will resolve in a timely manner, and with limited drawbacks for FMG.

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