Fortescue Metals (FMG) shares hit their highest levels in six years yesterday after several brokers upped their price targets for the stock following Tuesday’s solid quarterly and half yearly update.
That showed it had lowered its basic production costs and was on track to boost exports to new highs by June 30 which got investors all hot and bothered.
FMG shares hit an intraday high of $6.97, its highest since February 2011, and is ended up 2.2% at $6.81 as the enthusiasm eased during the session.
Fortescue said in its December report that said it’s on track for to meet the top end of its iron ore production forecast for the year, as demand and prices for the bulk commodity exceed market expectations.
Macquarie is one of the more bullish brokers, rating Fortescue an ‘outperform’ and lifting the price target to $7.60.
“Fortescue’s second-quarter production result was impressive, with stronger realised pricing boosted by positive provisional pricing the key highlight," Macquarie said. "The company continues to report sector leading cash costs … despite the absence of favourable currency movements."
Argonaut also raised its target price to $5.18 from $3.81, but kept a "sell" rating on the stock, citing recent share price appreciation – the stock rose more than 220% in 2016.
Meanwhile, Jefferies also upped its target, to $6.50 from $5.50, maintaining its rating at "hold".
But overall, the bears are dominant, with 10 of the 23 covering Fortescue rating it a ‘sell’, eight a ‘hold’ and only five a ‘buy’. The average price target is $6.43, according to Fairfax Media.
Investors were impressed by Fortescue’s price realisation in the December quarter; Fortescue’s ore has lower iron content than the product produced by rivals Rio Tinto and BHP Billiton, and therefore sells at a discount to the benchmark iron ore price.
Fortescue had told investors to expect its ore to sell at between 85% and 90% of the benchmark price in 2016-17, but in the December quarter it sold for 91.7% of the benchmark price on average.
Therefore Fortescue’s average realised price for the quarter was $US64.87 a tonne; well above the $US35 a tonne that Fortescue is said to need to break-even.
Based on the current Chinese iron ore spot price of around $US81-$US83 (depending in which source you use) Fortescue is making more than $US40 profit margin on each tonne shipped at the moment.
Over a full year if the figure was cut to $US30 a tonne to be conservative and account for any price slippage, Fortescue could make gross profits above $US5.1 billion (based on exports of 170 million for the year to June 30).