Fortescue (FSUGY, Financial)(ASX:FMG, Financial), the $14.3 billion mining company, reported a 20% increase in its ore mined to 53.5 million tons in its fourth quarter and a 14% rise in ore processed to 45.9 million tons.
Another company metric –Â cash production costs (C1) –Â declined by (-)7% year over year to $12.16 per wet metric ton (wmt) from the year prior. In review, this metric is a lot lower when compared to three years ago when the world’s fourth-largest iron producer and explorer had $34.03 per wmt.
“Fortescue’s June quarter results demonstrate the continued excellent performance being achieved by our teams in safety, production and operating cost improvement. In fiscal 2017, we delivered on our targets by shipping 170.4/mt of iron ore, improving our C1 cost by 17% to $12.82/wmt and generating strong cash margins during a period of volatility in the iron ore price.
“Leading into fiscal 2018, we are well positioned to continue our focus on productivity and efficiency initiatives to improve costs, to invest in the long-term sustainability of our core iron ore business and maintain production levels. Capital management, further strengthening the balance sheet and generating shareholder returns remain our key priorities.” – Fortescue CEO Nev Power
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Valuations
Fortescue is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 6.86 times vs. the industry median of 18.3 times, a price-book (P/B) ratio of 1.4 times vs. 2 times and a price-sales (P/S) ratio of 1.9 times vs. 1.7 times.
The miner also had a trailing dividend yield of 5.28% with 19% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 1.63 times and 6.64 times.
Total returns
Despite being undervalued, Fortescue ADR shares still outperformed the broader Standard & Poor's 500 index so far this year having generated 13.26% total returns vs. the index’s 11.9%.
Fortescue Metals Group
Fortescue Metals Group is an Australian iron ore company. It was the world's fourth-largest Iron ore producer as of March 2011.
The company has holdings of more than 87,000 km² in the Pilbara region of Western Australia making it the largest tenement holder in the state, larger than both BHP Billiton (BHP, Financial) and Rio Tinto (RIO, Financial).
In 2016, Fortescue generated 95.8% of its revenue in China.
Sales and profits
In the past three years, Fortescue had revenue growth average 2.5%, profit decline average (-)11.05% and profit margin average 13.8%.
Cash, debt and book value
As of June, Fortescue had $1.8 billion in cash on hand and $4.5 billion in gross debt or the sum total of an entities debt obligations. As a result, the company had a gearing ratio of 31% compared to 45% in the past year.
No assets or book value were observed in its recent production report. Meanwhile, the miner recorded 20.6% year-over-year growth in book value last year to $10.2 billion.
Cash flow
No cash flow figures were provided in the recent production report.
The cash flow summary
In the past three fiscal years, Fortescue allocated $3.71 billion in capital expenditures, reduced its debt by $9.88 billion net any issuances and other financing, generated $9.65 billion in free cash flow and provided $1.3 billion in dividends and repurchases on an average payout ratio of 16.9%.
Conclusion
Lacking specific GAAP figures, investors may be deterred from investing in the Australian miner Fortescue. It probably should address this.
Nonetheless, the production report did indicate that Fortescue mined and processed more ore than last year and has cut costs that could elevate higher profits in this fiscal year.
Further, gross gearing ratio supported by cash flow figures appeared to demonstrate that Fortescue has been busy reducing its overall debt in recent years.
Analysts had an average price target of 4.44 Australian dollars ($3.52) per share vs. 5.71 Australian dollars at the time of writing. Meanwhile, average analysts revenue estimates multiplied with three-year P/S average followed by a 15% margin indicated a per share figure of 4 Australian dollars per ADR share.
Contrary to undervalued valuations when using traditional multiples –Â P/E, P/BÂ –Â Fortescue is a hold.
Disclosure: I do not have shares in any of the companies mentioned.
