The Devil’s in the Detail for Fortescue

Investors missed the important news buried in the Fortescue Metals September quarterly report and focused instead the headline of record exports for the three months of 45.6 million tonnes.

That was up 3% from the June, 2021 quarter and a touch higher (1.3 million tonnes) than the 44.3 million tonnes shipped in the same quarter of 2020.

Production rose to nearly 61 million tonnes in the quarter from 58.4 million.

The quarterly record skated over a sharp fall in average prices compared to the June quarter while the average was still up marginally from the September, 2020 quarter.

The price per tonne for the quarter was down 30% quarter on quarter to $US118 a dry metric tonne (dmt) from $US168 a dry tonne (and $US135 a dry tonne for all of 2020-21)

This represents revenue realisation of 73% of the average Platts 62% CFR Index, compared to 84% during the fourth quarter and 89% in the September quarter of 2020.

In other words, Fortescue got a lower percentage of a lower 62% Fe fines price (as set by the Platts pricing platform owned by S&P Global) than it did in the June Quarter when the average price was much higher.

Compared to the $US106 a dry tonne average for the September 2020 quarter, the latest quarter’s average was 11% higher, but the realisation (73%) was sharply down from the 89% Platts 62% cfr figure.

(CFR means cartage and freight organised and paid by Fortescue which gives it greater control over the timing and pace of its shipments.)

But on top of this lower return for each tonne, from a lower price, Fortescue was forced to take a $US100 a tonne price cut for what are called in the trade ‘open tonnes’. They are iron ore shipments sales deal agreed to but not finally priced.

Fortescue said its average revenue of $US118.41/dmt in the September quarter “represents revenue realisation of 73 per cent of the average Platts 62% CFR Index of $US162.94/dmt, including the impact of mark to market pricing on open tonnes.

“The Platts 62% CFR Index decreased from US$218.40/dmt on 30 June 2021 to US$118.25/dmt at 30 September 2021. The contractual realisation achieved in the quarter was 77 per cent.

In the September quarter, Fortescue said its average revenue for was $US105.77/dmt “represented revenue realisation of 89 per cent of the average Platts 62% CFR Index of US$118.21/dmt. The Platts 62% CFR Index closed at US$123.15/dmt at 30 September 2020, compared to US$101.05/dmt at 30 June 2020.”

There was no mention of ‘open tonnes’ in the September 2020 report because the price was rising, the ore that was being shipped was snapped up quickly by steel mill buyers because the index price was rising.

But not in the September, 2021 quarter when the iron ore price fell steeply (upwards of 50%), meaning steel mills held back purchases and only committed as prices were seen to be lower.

The lower pricing of these ‘open tonnes’ will see earnings for the quarter and the December half come under more pressure though if prices remain mostly steady until the end of December, the impact should fade compared to the hit Fortescue has already taken.

The company didn’t provide any estimate of the financial cost (eg, if there was a million ‘open tonnes’ of ore in the quarter, this could mean $US100 million lower revenue). Earlier this week Mineral Resources gave us a glimpse of the impact on its much smaller iron ore export businesses with $US33.8 million reduction in revenue for 2021 shipments because falling prices in the September quarter.

On the plus side Fortescue’s C1 cash costs were in line with the previous quarter at $US15.25 a wet metric tonne but 20% above the $US12.74 a wet tonne in the same quarter of 2020, an increase already explained earlier in the year.

And at the end of September Fortescue’s net debt stood at $US175 million. While this is a deterioration from net cash of $US2.7 billion at the end of June, that was after the company paid record final dividends totalling US$4.7 billion and capital expenditure of US$744 million during the quarter.

Guidance for shipments, C1 cost and capital expenditure for the financial year to June 2022 is unchanged with shipments of up to 185 million tonnes.

Fortescue shares rose 0.1% to $14.02.


About Glenn Dyer

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.

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