Quality Dents Fortescue Dividend
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Fortescue Metals Group slid after the company yesterday revealed weaker than expected results for the six months to the end of last December as the company was hit by steep price discounts for its lower quality iron ore paid by Chinese steel mill customers.
The shares lost more than 4%, closing at $5.11 after Fortescue revealed it had cut its interim dividend by almost 50% as interim net profit fell 44% to $US681 million ($864.5 million) from $1.22 billion December, 2016 half year.
The iron ore miner’s board said in its interim announcement (http://www.fmgl.com.au/docs/default-source/announcements/hy18-half-year-results.pdf?Status=Master&sfvrsn=823f541d_4) it would pay an interim fully franked 11 Australian cents a share, down sharply from the 20 cents paid in the first half of 2016-17.
Revenue in the six months ended December 31 fell 18% to $US3.68 billion from $US4.49 billion in the first half of 2016-17.
The discount for its lower-grade 58% Fe iron ore (compared to the 62% Fe (iron oxide) content for standard quality ore delivered to China by competitors like BHP and Rio) fell to 68% of the benchmark iron ore price from 86% in 2017.
Revenue and shipments fell because Chinese steel mills used more higher-grade iron ore from the likes of BHP and Rio, and Vale of Brazil as Beijing clamped down on pollution. Higher quality ore is more energy efficient and doesn’t need sintering (which upgrades the iron oxide - Fe- content)
Shares in Fortescue Metals Group have fallen about four per cent in early trade on the Australian market on Wednesday as the market digested the company's results. Shortly before 10.30, Fortescue was trading at $5.135, down 22.5 cents on the previous close.
The company also reported a 31% slump in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to $US1.83 billion.
Fortescue's new chief executive officer, Elizabeth Gaines, said the miner had "continued to deliver" in the first half of fiscal 2018, maintaining production guidance of 170 million tonnes per annum, and lowering C1 costs.
Cash at December 31 2017 was $US892 million with gross debt reducing to $US4.2 billion and a net gearing level of 25%.
Fortescue said it had established a new $US1.4 billion Term Loan with proceeds to be used to partially repay the high cost 2022 Senior Secured Notes and lower Fortescue’s borrowing costs. The money will come from a group of Chinese and other international banks.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.