Fortescue (FMG) is the third-largest iron ore miner in Australia and is diversifying into a global renewables and resources company through the activities of its green energy division. Fortescue shipped about 46 million metric tons of iron ore in the first quarter of FY24. This was in line with our expectations but 3% below the same quarter in FY23 and 6% below the June quarter. Shipments from its new 69%-owned Iron Bridge mine were immaterial. Fortescue’s average realized price was US$100 per metric ton, up 14% on last year, driven by higher benchmark prices and a lower discount, which fell to 13% from 15%. Due to its generally lower-grade ore of 57–58% iron content, Fortescue incurs a discount to the 62% iron benchmark price. Those discounts tend to shrink when steelmaking margins contract, as has happened. Steel mills then act to minimize costs by using cheaper, lower-grade iron ore, rather than maximizing steel volumes by using higher-grade ore when steelmaking margins are high. Iron ore prices remain elevated on strong Chinese steel production.
We continue to forecast sales of about 192 million metric tons (its share) in FY24, similar to last year. With Iron Bridge ramping up to full production, likely in FY26 or FY27, we forecast sales will rise to about 210 million metric tons in FY28. The shares trade at a large premium to fair value, which we think reflects current iron ore prices that remain elevated compared with the cost curve, as well as discounts for lower-quality ore that are low compared with historical averages. We also think the premium reflects enthusiasm around the company’s bold green energy ambitions. In our view, however, it is too early to get excited about green energy with commercially viable options not yet proved. We maintain our Sell recommendation and $16.00 fair value estimate.