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Fortescue profit spikes on iron ore price jump, but dividend seen conservative

Australia’s Fortescue Metals Group Ltd (FMG.AX) reported a near four-fold jump in half-year profit on Wednesday as it cashed in on higher iron ore prices, while analysts said a lower-than-expected dividend reflected caution on the global economy.

Fortescue is the second of the global iron ore giants to report results this season, and also the second to offer lower than anticipated payouts which analysts said reflected a move to keep cash in reserve given uncertainties over global economic growth following the coronavirus outbreak.

BHP Group on Tuesday also declared a slightly lower dividend despite a windfall from last year’s fillip in iron ore prices.

Net profit for the six months ended Dec. 31 was $2.45 billion, compared with $644 million a year earlier. The figure was higher than a UBS estimate of $2.37 billion.

The Perth-based miner declared an interim dividend of A$0.76 per share, up from A$0.19 per share last year but below a consensus forecast of A$0.80 cents. Shares had climbed 1.3% to $A11.20 by 0236 GMT, outperforming peers.

“It’s a solid, in-line result with the dividend slightly light. The board is opting to be conservative given the uncertainties over global growth,” said UBS analyst Glynn Lawcock.

Following the disaster at a tailings dam owned by then top iron ore producer Vale SA (VALE3.SA) in January last year, iron prices soared, with Dalian Commodity Exchange’s front-month iron ore futures contract DCIOc1 gaining 28% in 2019.

Analyst Lawcock said investors were now waiting to see if more cash may be returned if the economy holds up this half, a move hinted at by the company.

“It’s not unusual for the interim to be a bit lower and that we have a stronger full-year payout ratio,” Chief Executive Elizabeth Gaines told reporters during an earnings call.

Gaines also said that Fortescue’s iron ore shipments and customer payments had not been affected by the coronavirus, although rising steel inventories and logistics were a key headwind for its customers. Still, it was confident that China would hit its growth targets.

“We are confident in the strength of the Chinese economy with the government maintaining its commitment to growth targets led by further stimulus and infrastructure investment,” Gaines said.

China, the world’s top steel producer, posted its second-highest ever annual imports of the steel-making ingredient in 2019 as Beijing boosted stimulus to avoid an economic slowdown, prompting strong demand from the property and infrastructure sectors.

Fortescue reported record half-year iron ore shipments of 88.6 million tonnes last month when it revised down its cost guidance to US$12.75–US$13.25 per wet metric tonne and indicated production would reach the top end of its target range.

The company has been raising the mix of premium feed in its shipments with the addition of its West Pilbara Fines product, which had allowed it to achieve pricing of 84% of the Platts 62% index for the past four quarters, it said.

As steel prices have come under pressure, producers are turning to cheaper and lower grade ore, Gaines said.

“There’s no doubt that steel margins are under pressure …(which) does underpin the strength of our product.”

The miner also maintained its forecast iron ore guidance of shipments at the upper end of the 170-175 million tonne range despite supply disruptions in Western Australia. Cyclone Damien earlier this month forced Rio Tinto to downgrade its production forecast.
Source: Reuters (Reporting by Melanie Burton in Melbourne; Additional reporting by by Aby Jose Koilparambil in Bengaluru; Editing by Krishna Chandra Eluri and Lincoln Feast)

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