Iron Bridge And Green Initiatives Will Shape Future Prospects, Yet Falling Hematite Prices And Rising Costs May Challenge Earnings

Key Takeaways

• High-grade magnetite export and strategic zero-emissions partnerships are expected to boost revenue and improve margins through technology sales.
  
• Commitment to disciplined spending and cost management bolsters cash flow, enabling dividend payouts and earnings stability amid market fluctuations.
  
• Declining commodity prices, cost pressures, project delays, and regulatory uncertainties could significantly impact Fortescue's earnings, margins, and cash flows.

Catalysts

Engages in the exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally.

• Fortescue's ramping up of the Iron Bridge project with a focus on high-grade magnetite concentrate export is anticipated to enhance future revenue streams significantly as production optimizes towards nameplate capacity.
  
• Strategic partnerships and contracts in zero-emissions technology, such as the $2.8 billion deal with Liebherr for zero-emissions mining equipment, are expected to generate substantial revenue for Fortescue Zero, potentially improving net margins via technology sales and services.
  
• Advancements in green hydrogen and energy projects, despite current global uncertainties, are positioned to provide long-term growth and diversification, impacting future revenues and earnings as these projects become economically viable.
  
• Fortescue’s commitment to disciplined spending and reassessment of project timelines in response to global market uncertainties ensures capital is efficiently allocated, potentially improving free cash flow and enabling future dividend payouts.
  
• Successful management of production costs, such as maintaining a low C1 cost, positions Fortescue favorably to sustain its EBITDA margins even as it navigates fluctuations in realized hematite prices, impacting earnings stability and growth.

Fortescue Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortescue's revenue will decrease by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.9% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $0.78) by about March 2028, down from $3.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.2 billion in earnings, and the most bearish expecting $1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, up from 8.2x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 11.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Fortescue Future Earnings Per Share Growth

Risks

• Declining hematite prices have led to a 20% reduction in revenue compared to the same period last year, which can impact overall earnings if prices do not recover.
  
• Cost inflation and mine plan lead cost escalation have increased C1 costs by 8% year-on-year, potentially placing pressure on net margins if these trends continue.
  
• Delays in ramping up the Iron Bridge facility to nameplate capacity could delay anticipated revenue from this asset, affecting earnings projections.
  
• Regulatory and policy uncertainties, such as the Inflation Reduction Act in the U.S. and RED II in Europe, could delay investment in green energy projects, altering expected timelines and potentially impacting future revenue streams from these initiatives.
  
• Sustaining capital expenditure is increasing, partly due to needed fleet upgrades, potentially straining free cash flow if operational cash flows do not improve correspondingly.

Valuation

• The analysts have a consensus price target of A$18.328 for Fortescue based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$22.2, and the most bearish reporting a price target of just A$14.94.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.4 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$16.49, the analyst price target of A$18.33 is 10.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.