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Nothing could be finer than dividends from this miner

Andrew Main
Wednesday, August 28, 2019

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Quick quiz: which successful and substantial Australian mining stock is enjoying a current yield of almost 16%, fully franked, and a current price earnings ratio of less than five times?

It’s Fortescue Metals, which has just beaten consensus forecasts for its full year performance by a solid margin, reduced net debt by a billion US dollars, diversified slightly away from its main iron ore product and increased its full  year dividend payout by just under 400%, from 23 cents to $1.14.

That dividend looks mighty generous compared to the last one but it’s still only 78% of profits, which is well within the envelope of customary dividend distribution among listed players in Australia.

CEO Elizabeth Gaines said that she fully planned to retain the policy of paying out between 50 and 80% of profits to shareholders, being quoted in the AFR as saying that “we think the dividend policy is definitely sustainable”.

We’re talking about a lift of almost 200% in Fortescue’s underlying net profit here, from just over $US1 billion to just under $US3.2 billion.

Oh, and the company’s share price dropped 40 cents or five per cent to $7.17 on Monday in the wake of the result, bouncing back to $7.55 yesterday once more rational thought was brought to bear.

What spooked the punters on Monday was the elephant in the room: the global price for iron ore.

Fortescue has, through no fault of its own, become a bet on what’s going to happen in the US-China trade war and right now it’s not looking that marvellous.

The 2018-9 year was a stellar year for Andrew Forrest’s one-time upstart disruptor, but the price for 62% iron ore on global markets has subsequently dropped from around $US120 a tonne to around $US82 a tonne.

And from all accounts the price isn’t showing any obvious signs of wanting to stop falling.

Part of it comes from the recovery in iron ore deliveries to China from Brazil in the wake of January’s Samarco dam disaster, bringing back some equilibrium to what had been an absolute seller’s market for Fortescue’s ore.

But most of the downward pressure on the iron ore price has to be a function of  the trade threats posed by the spat between US President Donald Trump and President Xi of China.

The results announcement contained a presentation in which Fortescue called itself a “core supplier to the Chinese market” in iron ore.

That’s a claim that unfortunately works two ways. In one way it’s great: China provided some 93% of Fortescue’s revenue in the year just ended.

But as long as the President of the US doesn’t have his Twitter account closed and the leader of the world’s fastest growing economy doesn’t suddenly surrender in the trade war, neither of which looks very probable, it becomes something of a liability.

Corporates aren’t too bad at estimating future prices for their goods but guessing what’s happening in Donald Trump’s mind is a higher order challenge altogether.

Even though Fortescue is shipping lower grade ore than what’s supplied by the likes of BHP and Rio, it’s still higher grade than what the Chinese can mine for themselves and incidentally, Fortescue has perhaps accidentally done one thing backwards.

It started out shipping lower grade iron ore, around 55% iron content, compared with the much higher quality or from BHP and Rio, but now Fortescue is enjoying shipping higher quality ore and is aiming now to blend ores from different mines to deliver ore that has a 60% Fe (iron) content.

It’s interesting to remember that Forrest got the whole thing going around 2000 by pegging all the ground he could in the Pilbara that BHP and Rio had concluded wasn’t worth bothering about, given the very high quality of what they were sitting on already.

It’s normal practice for miners to start out by shipping the highest quality product they can, then let the standard slip as they pay off debt and start to exploit the lower quality ore.

The market is assuming the worst about the likes of Fortescue, despite the fact that the company issued guidance on Monday to say that ore shipments in the current financial year will be between 170 and 175 million tonnes, compared to 167.7 million tonnes last year, with most other metrics showing a small improvement.

There’s another timing factor at work here, too, not that it is a negative for Fortescue. Let’s call it noise.

Treasurer Josh Frydenberg has only just put down the microphone after a clarion call to Australian corporates to hand out less of their profits in dividends, and to invest more.

That coincided with the news that Fortescue founder Andrew Forrest has just trousered $1.24 billion in fully franked dividends in consequence of the latest result, give that he owns just over 35% of the company.

That is almost certainly the first time anyone in Australia’s picked up more than $1 billion in dividend payments in one hit.

In fact Fortescue’s about to start work on a new mine called Elliwanna that will cost over $1 billion and is also going to do a joint venture with Formosa Steel of Taiwan and Baosteel of China to build a magnetite ore project called Iron Bridge.

That’s going to cost more than $2.5 billion and will employ 3,000 people during the four year construction stage, and around 900 people once it’s up and running.

All of which suggests that Fortescue’s well on the right side of the ledger with Josh Frydenberg’s campaign to get companies to invest, even if he might have had a bit of heartburn over the dividend payout.

All chairman Andrew Forrest and his CEO Elizabeth Gaines have to worry about now is Donald Trump.

Published: Wednesday, August 28, 2019

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