FMG Share Price Down on FY19 Results: More Pain to Come

At time of writing, the share price of Fortescue Metals Group Ltd [ASX:FMG] is down 3.96% trading at $7.27.

The share price has shed over 20% since it hit a 52-week high on 4 July, with the FMG share price going sideways in August:

FMG Share Price Chart 2019

Source: tradingview.com

Recent movement in the FMG share price has been driven by a decline in iron ore prices.

We look at the highlights from their FY19 results and examine the FMG outlook. Despite the company’s records profits, share buyback scheme and a strong dividend pay-out ratio, it may be time for investors to look elsewhere.

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FMG results beat expectations but iron ore market is changing

FMG actually shipped less iron ore this year than at any point in its 12-year history.

But strong iron ore prices that came on the back of Brazilian export disruptions underpinned a record profit for FMG.

According to Bloomberg, analysts had expected FMG to bring in US$9.84 billion in revenue and US$3.03 in profit.

However, FMG beat expectations. The company reported a profit of US$3.18 billion from revenue of US$9.96 billion, and a fully franked final dividend of 24 cents.

This brings the total dividends for the year to $1.14 at a payout ratio of 78%.

So with $1.24 billion in dividends paid and the $500 million share buyback scheme underway, this could explain why the share price has moved sideways in August instead of sharply down.

This being said, Reuters has reported that Brazilian supply of iron ore is now coming back online with the country’s shipments up 16.6% to a nine-month high.

RBA iron ore forecast points to further pain for FMG investors

Have a look at this recently released chart from the RBA:

Iron Ore Price - Fortescue Metals Group shares

Source: RBA

Now, you can see they clearly got it wrong at the start of the year.

But this was due to unforeseeable events unfolding in Brazil where a tailings dam broke, sparking an extensive safety review in the country that curtailed exports.

Barring further unforeseen events, their outlook could prove to be spot on, if not conservative.

Last week, benchmark 62% iron ore hit $83.75 a tonne down 33% from its peak of $125.20 on 3 July.

Recent Reuters/Refinitiv data points to the decline in iron ore prices being halted by firm Chinese demand and lower year-on-year export volumes out of Brazil and Australia.

So FMG investors might have a small respite before a storm hits.

The storm could take the form of a global mid-cycle slowdown, a sharp decline in steel mill margins or a Chinese debt crisis.

Or it could be some combination of these factors.

As a result, it may be wise to snag a profit on the FMG share price while it is still up around 80% over the past 12 months.

For alternative investments as the mid-cycle slowdown approaches, the recent rising gold price is worth your attention. Get the names of our two favourite gold stocks in this free report. While low interest rates persists, the precious metal could continue to perform.

Regards,

Lachlann Tierney

For The Rum Rebellion


Lachlann Tierney is a writer for The Rum Rebellion and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. 


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