Fortescue Ltd (FMG) - September quarter production update

Fortescue Ltd engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally. The company explores for copper and lithium deposits; and rare earth elements. The company also focuses on producing green energy and green hydrogen, including derivatives comprising green ammonia, as well as green technology development and manufacturing. Fortescue Ltd was incorporated in 1983 and is headquartered in Perth, Australia.‍

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Fortescue (FMG) provided a preliminary September quarter update that was weaker-than-anticipated. Iron ore shipments of 46.8 million tonnes (Mt) over the quarter was down 6% year-on-year and below market expectations for 49.7Mt. While maintenance activity and planned port shutdowns affected shipments, the larger issue remains the unresolved iron ore contract negotiations with the China Mineral Resources Group (CMRG), which meant that sales volumes were even softer at 42.9Mt, as the state-backed buyer restricted deliveries of FMG cargoes. Lower realised pricing, at 82% of benchmark prices, likely reflects the discounts FMG had to accept in order to sell its super special fines products. The key issue in negotiations with CMRG appears to be long-term offtake pricing. Media reports indicate BHP has offered a 1.8% discount on sales under its long-term supply agreements with CMRG. We assume FMG can conclude its negotiations with CMRG by the end of CY26, but if negotiations drag on, management may need to alter mine plans, adjust stockpiling strategies and reconfigure parts of its supply chain to accommodate lower sales volumes.

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Reflecting the weaker realised prices, and lower shipments and sales to date, we reduce our FY27 EPS estimates by 12.2%. Given the modest impact to the discounted cash flow valuation, we leave our target price of $19 unchanged.

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