Supply Chain Challenges Could Delay Revenue From Green Iron Plant At Christmas Creek

Key Takeaways

• Aggressive expansion into green energy could strain financial resources and affect future earnings if costs exceed expectations or revenues materialize slowly.
  
• Large capital investments in projects may dilute returns if competitive costs and demand are not achieved, affecting margins and profitability.
  
• Fortescue's focus on green energy, innovative technologies, and financial resilience positions it for sustainable future growth and improved profit margins.

Catalysts

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

• Fortescue's aggressive expansion into green hydrogen and green energy projects could strain financial resources if costs exceed expectations or revenues from these emerging markets materialize more slowly than anticipated, potentially impacting future earnings and cash flow.
  
• Significant capital allocation towards large-scale energy projects like Holmaneset in Norway and Pecem in Brazil may dilute return on capital if these projects do not achieve competitive production costs and necessary demand, affecting margins and long-term profitability.
  
• The company's commitment to Real Zero by 2030 without using carbon offsets involves significant investment in new technologies, which may elevate operational costs and capital expenditures, pressuring net profit margins.
  
• Fortescue's investments in innovative projects such as the Green Iron Plant at Christmas Creek require addressing supply chain challenges and technological proof-of-concept, which could delay commercialization and expected revenue growth.
  
• Market reliance on the green hydrogen and green metals growth story may lead to stock overvaluation if these sectors do not develop at the projected rapid pace, potentially affecting investor returns in the short to medium term due to earnings volatility.

Fortescue Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fortescue's revenue will decrease by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.2% today to 17.8% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $0.85) by about February 2028, down from $5.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.4 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 17.1x on those 2028 earnings, up from 6.7x today. This future PE is greater than the current PE for the AU Metals and Mining industry at 13.7x.
• 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 7.28%, as per the Simply Wall St company report.

Fortescue Future Earnings Per Share Growth

Risks

• Fortescue's strong operational performance and maintained industry-leading cost position indicate a stable revenue stream. The company achieved its third highest earnings and second highest free cash flow, positively impacting earnings and cash flow stability.
  
• Advancements in green energy projects and new exploration in various international locations suggest potential diversification and revenue growth opportunities beyond traditional mining, which could bolster future revenues.
  
• Fortescue's commitment to decarbonization and innovative green technology development, such as the Green Metals and Iron Bridge projects, positions the company favorably for future margins improvement through sustainability and efficiency.
  
• A robust balance sheet, with low debt to EBITDA ratio and strong cash flow, along with significant returns to shareholders, points towards financial resilience and the ability to sustain future earnings and shareholder value.
  
• Fortescue's ongoing investments in technological innovations and partnerships, such as their cutting-edge battery intelligence software and green hydrogen capabilities, could enhance long-term profit margins and present new revenue opportunities from commercialization.

Valuation

• The analysts have a consensus price target of A$18.724 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$21.99, and the most bearish reporting a price target of just A$15.27.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.6 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of A$19.72, the analyst price target of A$18.72 is 5.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.