Balanced Update – Fortescue Metals Group (FMG) Q2 FY25

*** GENERAL ADVICE ONLY***

Financial Performance

• Hematite C1 cost: Decreased to US$18.24 per wet metric tonne (wmt), 10% lower than Q1 FY25.
• Hematite average revenue: US$87/dry metric tonne (dmt), achieving 85% of the average Platts 62% CFR Index.
• Iron Bridge Concentrate revenue: Reached US$117/dmt, 99% of the average Platts 65% CFR Index.
• Cash balance: US$3.4 billion, and net debt of US$2.0 billion as of December 31, 2024.

Operational Highlights

• Iron Bridge project: Shipped 1.5Mt in Q2 FY25, contributing to 3.2Mt in H1 FY25.
• Hematite C1 cost reduction: Attributed to increased ore mining volumes, lower strip ratio, and favorable AUD:USD exchange rate.
• Decarbonization progress: Contract awarded to XCMG for over 100 pieces of zero emissions heavy mobile equipment.

Marketing and Product Mix

• Iron Bridge Concentrate performance: Revenue at 113% of the average Platts 62% CFR Index.
• Product mix: Included Iron Bridge Concentrate, West Pilbara Fines, Kings Fines, Fortescue Blend, Fortescue Lump, and Super Special Fines.
• China portside sales: Through Fortescue Trading (Shanghai) Co., Ltd., reached 3.7Mt in Q2 FY25.

Exploration and Energy

• Exploration and studies capital expenditure: US$67 million in Q2 FY25.
• Iron ore exploration: Ongoing activities in the Pilbara and drilling at the Belinga Iron Ore Project in Gabon.
• Critical minerals exploration: Progress in Argentina, Peru, and Kazakhstan.
• Green technologies and energy projects: Development of 6 megawatt fast charger technology for battery electric trucks.

Financial Position and Guidance

• Capital expenditure and investments: Totaled US$1.0 billion for the quarter.
• FY25 guidance:
  • Iron ore shipments: 190-200Mt (including 5-9Mt for Iron Bridge).
  • Hematite C1 cost: US$18.50 – US$19.75/wmt.
  • Fortescue Metals capital expenditure: US$3.2-US$3.8 billion.
  • Fortescue Energy net operating expenditure: ~US$700 million.
  • Fortescue Energy capital expenditure: ~US$500 million.

Positive Impacts on Analyst Expectations

1. Record-Breaking Shipments and Strong Operational Metrics:

   • Iron ore shipments of 97.1Mt in H1 FY25 and 49.4Mt in Q2 FY25 surpass previous records, exceeding expectations for strong production output during a seasonally favorable period for Chinese steel production. This aligns with Ord Minnett’s optimism and could strengthen their EPS forecast upgrades for FY25 (+9.7%) and FY26 (+17.5%).
   • Improved TRIFR to 1.0 and reduced hematite C1 costs (US$18.24/wmt) could mitigate concerns about operational risks and rising input costs, influencing brokers like UBS and Bell Potter, who previously highlighted challenges with costs.

2. Revenue Performance:

   • Strong revenue for hematite (US$87/dmt, 85% of Platts 62% CFR Index) and Iron Bridge Concentrate (US$117/dmt, 99% of Platts 65% CFR Index) indicates a healthy margin environment. This may prompt analysts like Citi and Morgans to revise FY25 revenue and dividend forecasts upward, given their neutral stance on bulk pricing.

3. China Stimulus and Portside Sales Growth:

   • China portside sales (3.7Mt in Q2 FY25) reflect FMG’s ability to capture market share amid a recovering Chinese steel sector. This aligns with Morgan Stanley’s and Citi’s commentary about the benefits of China’s stimulus and stable bulk pricing.

4. Decarbonization Initiatives:

   • The contract for zero-emissions heavy equipment reinforces FMG’s commitment to ESG goals, potentially easing longer-term governance and decarbonization concerns highlighted by Morgans.

Negative or Neutral Impacts on Analyst Expectations

1. Guidance Reaffirmed, Not Raised:

   • While guidance for FY25 remains unchanged (190-200Mt shipments), UBS and Macquarie may view this conservatively. UBS previously noted that FMG was tracking below the mid-point of guidance, and this report does not necessarily allay those concerns.

2. Market Pricing and Broader Commodity Weakness:

   • The report’s positive iron ore performance may not fully offset the broader market challenges identified by Macquarie, such as declining prices in other commodities and longer-term supply pressures.

3. Capital and Expenditure:

   • Capital expenditure of US$1.0 billion in Q2 FY25 and Fortescue Future Industries’ higher operating expenditure (~US$700 million) could weigh on sentiment among brokers like Bell Potter and Macquarie, who are cautious about FMG’s financial sustainability amid decarbonization and diversification efforts.