‘We remain positive on stocks with iron-ore exposure due to strong cash flow yields and earnings upgrade momentum.’
Iron ore price run reverses
Iron ore prices were the hot story of 2021. Well, the first half of it, at least.
In the last few months the all important commodity has cratered. In May, the commodity peaked at US$233 per tonne. This feat likely left iron ore bulls salivating and those trading in and out of commodity linked stocks – the likes of Fortescue Metals Group, BHP Group and Rio Tinto – more optimistic than ever.
Indeed those companies – the big three miners, that is – have essentially been printing cash and paying said cash out to investors at a rapid click. Fortescue Metals Group, trading under the ticker FMG, illustrates that point most clearly with its recent full-year results.
Here FMG a significant bump in revenue and earnings, driven by drastically higher iron ore prices. Overall, the miner's average revenue increased 72% to come in at US$135 per tonne across fiscal 2021, while recording a staggering 73% earnings (EBITDA) margin.
The miner didn't leave investors wanting either, declaring a final dividend of AUD$2.11 per share, taking full-year dividends to AUD$3.58 per share or AUD$11 billion.
The outlook appears less certain right now, with iron ore prices last sitting around the US$133 per tonne mark, some 42% off the peak recorded in May. That will have a flow on effect, to be sure and the market knows it.
The FMG share price is down 19% in the last month, as investors increasingly focus on the downside risk.
A bullish view
Yet Macquarie – long an iron ore bull – remains optimistic, in a recent note declaring that the ‘key indicators remain positive’.
As the bank’s analysts stressed: Major iron ore miners continue to generate solid free cash flow at spot prices despite recent market volatility amid steel production cuts.’
More broadly, it was noted that ‘We remain positive on stocks with iron-ore exposure due to strong cash flow yields and earnings upgrade momentum.’
Rio Tinto – which Macquarie has an Outperform rating on an $153 price target is the investment bank’s preferred iron ore large cap.
That's not to say the investment bank negatively views FMG or BHP: both have Outperform ratings assigned to them and price targets of $25.00 and $54.00, respectively, implying the expectation of further upside from current price levels.
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Shane Walton | Financial Writer, Australia
10 September 2021