Fortescure Metals (FMG)

By Jason Fittler

Fortescue Metals (FMG) is an iron ore mining and development company.

It has a significant tenement holding and resource base, and is in the process of ramping up production from the Christmas Creek and Cloudbreak mines.

The company's early goal is to lift production to 55Mtpa and then to 90Mtpa if the market demands it and the cash flow is available.

Our base-case net present value for FMG is A$4.76ps, up from A$3.80ps, and is based on a 55Mtpa production rate.

Following the changes to our iron price forecasts, our cash flow estimates have increased substantially. Our target price is set at a proxy for FMG’s 95Mtpa production scenario, and has increased in line from A$5.08 to A$6.41.

Key risks to our target price include delays in shipping, increased capital expenditure, the delivery of ore specified in sales agreements, higher operating costs, lower production rates and the ability to finance expansion.

The risks to the upside are higher-than-forecast iron ore prices, a faster improvement in operating costs and the potential for Solomon to be advanced earlier should funding or a joint-venture partner be forthcoming to fast-track the development. This, in turn, would advance the potential for FMG to become a 155Mtpa producer.

The increased iron ore price forecasts have delivered an additional US$550m-650m pa in operating cash flow over our forecast horizon.

We believe the higher cash generation increases the likelihood of FMG delivering on the 55Mtpa and 95Mtpa production targets out of the Chichester’s.

In our view, a buoyant iron ore market should also enable FMG to progress the development of Solomon with greater confidence and improve its ability to self finance part and borrow for the balance.

We upgrade from a Hold to Buy, with a A$6.41 target.

For more information on Fortescure Metals (FMG) please call us on 07 4771 4577.