FMG 0.41% $14.54 fortescue metals group ltd

citigroup report on metals and mining sector

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    source: citigroup, pls DYOR, thx.

    Metals & Mining Sector
    20 November 2008
    8 Citigroup Global Markets
    Fortescue Metals Group Ltd (FMG.AX)
    Cash flow and capex
     Production Cut — We have downgraded production to reflect the dramatic
    cuts to global steel production, changes to the mine plan to produce a lower
    alumina product and further expected delays to the expansion to 80mtpa.
     Iron Ore Price Key — At our forecast of a 20% decline in 2009 prices the
    company is able to fund capex for the expansion to 80mtpa in 2009 and
    2010. If contract prices fall to spot levels (-35%) then the position is tighter,
    but manageable if the project is delayed. If prices fall to trough levels (-50%)
    then we expect the expansion to be put on hold until the market improves.
     Volume Critical — With an estimated 50% of costs largely fixed, it becomes
    critical that volume is not cut too dramatically. Lowering the alumina
    content, sharing the pain on lower freight rates from contracted rates and
    some shipments being cancelled are all allowed for in our estimates. If 2009
    shipments were to fall below 40mt at trough cycle prices (-50% on iron ore)
    then cash flow becomes a major issue.
     Debt Position — Debt, excluding the Leucedia royalty, is expected to rise
    from A$2.3b to A$3.5b at the end of the year, simply on the depreciation of
    the A$ to 65¢, from 95¢ at 30 June.
     Leucedia Royalty — Our valuation of the Leucedia royalty is now A$850m,
    significantly below the after-tax carrying value of A$2.8b that we expect to
    be reduced substantially given the rapid reversal in iron ore prices and
    slower ramp-up expectations.
     Funding Options — The company raised A$200m from transferring assets
    into operating leases during the September quarter, and this could be an
    additional source of financing going forward as infrastructure is completed
    for the initial 45mtpa and optimisation to 55mtpa.
    Company Focus
    Buy/High Risk 1H
    Price (20 Nov 08) A$1.29
    Target price A$3.10
    from A$4.50
    Expected share price return 140.3%
    Expected dividend yield 0.0%
    Expected total return 140.3%
    Market Cap A$3,622M
    Price Performance (RIC: FMG.AX, BB: FMG AU)
    FMG.AU (Y/E Jun) 2008A 2009E 2010E 2011E
    Reported Profit (A$m) -2,516.2 941.9 1,122.5 1,179.4
    Core Net Profit (A$m) -89.9 941.9 1,122.5 1,179.4
    Core EPS (A¢) -3.2 33.4 39.8 41.8
    Core EPS Growth (%) -158.9 1,141.3 19.2 5.1
    PE Ratio (x) -40.2 3.9 3.2 3.1
    DPS (A¢) 0.0 0.0 0.0 0.0
    Dividend Yield (%) 0.0 0.0 0.0 0.0
    Franking Rate (%) 0.0 0.0 0.0 0.0
    P/Operating Cashflow (x) -9.8 3.9 3.0 2.6
    ROE (%) na na na 410.5
    Source: Powered by dataCentral
    Target price change 
    Estimate change 
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