• 3Q22 results were below expectations. Revenue and PATMI were at 20%/12% of our FY22e forecast as ASPs were lower than expected.
• 3Q22 sales volume increased 35.3% YoY. Unit costs decreased accordingly.
• Maintain ACCUMULATE with a lower TP of S$0.50, down from S$0.51. We lower FY22e PATMI by 29.6%, factoring in weaker iron ore prices and higher operating expenses. We lower ASPs by 8% to US$110/DMT. Our TP remains pegged to the industry average, which is now 10x FY22e PE, up from 8x previously.

The Positives

+ Recovering sales volume. Iron-ore concentrates sold increased 35.3% YoY in 3Q22. Revenue was lifted by 7.3% YoY, even with weaker iron ore prices in 3Q22.

+ Higher gross profit margin. Gross profits increased marginally 6.6% YoY. This was achieved with lower average unit cost, which dropped from US$25.26/WMT in 3Q21 to US$20.22/WMT, in spite of ASPs that fell from US$110.06/DMT in 3Q21 to US$87.44/DMT, in line with weaker iron ore prices.

The Negatives

– Lower PATMI and EPS due to higher operating expenses. Revenue increased on a YoY basis, but PATMI fell 34.5% due to higher selling and distribution expense and other operating expenses that almost doubled to US$4.2mn. This was due to higher ocean freight charges for export sales and royalty and commission expenses.

– Operating cash flow decreased. Operating cash flow decreased from US$11.7mn to US$6.4mn, due to lower profit after tax and higher levels of trade receivables and inventories. Free cash flow also decreased from US$10.5mn in 3Q21 to US$4.8mn in 3Q22.

Outlook

Demand for iron ore. According to the World Steel Association, YTDNov21, global crude steel production increased 4.5% to 1.7bn tonnes. However, it has been slowing in 4Q21, led by reduction of steel production in China. According to the China Iron and Steel Association, China’s steel output declined in 2021, producing an estimated 1.03bn tons of steel, which is down 3% YoY.

Total steel demand in 2022 is expected to remain at similar level as 2021, with the real estate sector expected to slow down but infrastructure investment is expected to pick up. The concentration rate of steel mills in China is expected to increase, as the smaller steel mills are acquired by the larger ones.

Supply of iron ore. Vale, the largest Brazilian iron ore producer, announced on 29 November 2021, that it would produce 315mn-320mn metric tonnes of iron ore in 2021. On January 10 that the company was maintaining its 320mn-325mn metric tonnes guidance for 2022. Rio Tinto, Australia’s largest iron ore producer, guided for exports of 320mn-335mn metric tonnes. Iron ore shipments in 2021 totalled 321.6mn metric tonnes.

We are expecting Vale to lead the supply growth of higher grade iron ore, of 65% and above. With the emphasis on energy-consumption standards, we also expect demand for high-grade iron ore to remain resilient.

Iron ore prices have been recovering from November lows, and are expected to remain around US$150/DMT.