The Positives
+ Stronger cash flows. On a full-year basis, free cash flows surged 113% YoY to US$15.1mn, largely due to lower trade receivables.
The Negatives
– Lower sales volume. Revenue and PATMI dropped 70% and 83% YoY respectively, due to lower sales volume which dropped 73% YoY. This could be attributed to lower capacity due to the spread of the Omicron variant and unfavourable weather conditions. Revenue and PATMI for FY22 dropped 9% and 21% YoY respectively.
– Net cash to net debt. Fortress Minerals recorded net debt of US$15.2mn in FY22, as compared to net cash of US$5.8mn in FY21. This is due to new bank borrowings of US$23.3mn, mainly used to finance the acquisition of Fortress Mengapur and lower profit after tax recorded in FY22.
Outlook
Demand for iron ore. According to the World Steel Association, YTDMar22, global crude steel production decreased 5% to 458.7mn tons. In 1Q22, China’s crude steel production was down 8.4% YoY to 245.0mn tons (Figure 1).
The National Development and Reform Commission has pledged to continue cutting steel output for 2022. According to the China Iron and Steel Association, the country met the target of controlling steel output last year at 1.035bn tons, down 3% YoY. In 2022, steel demand from the real estate sector is expected to slow down but infrastructure investment is expected to pick up.
Another factor which would be hampering low-grade iron ore demand growth would be the road to decarbonisation of China’s steel industry. This includes producing more steel from electric arc furnaces (EAF), which could use half as much energy as blast furnaces and only emits 25% of carbon dioxide. In the 14th five-year plan, China has set a goal of EAF-produced steel accounting for 15-20% of national steel output. In 2020, EAF-produced steel only accounted for 9.2% of total steel output. This would support the demand for high-grade iron ore which has less impurities.
Supply of iron ore. To reduce reliance on iron ore imports, China would be increasing their iron ore production levels. YTDMar22, iron ore production was up 19% YoY to 250.5mn tons.
Supplies from the world’s two largest iron ore exporting countries have not been keeping pace. YTDApr22, Brazil iron ore exports was down 8% to 76mn tons. YTDFeb22, Australia iron ore exports was up 2.7% to 135mn tons.
The Russia-Ukraine conflict would have minimal impact on China’s iron ore supply. Imports from these two countries accounted for 2.3% of China’s total iron ore imports, while Australia and Brazil accounted for 62% and 21% respectively.
Upgrade to BUY with higher TP of S$0.66, from S$0.50
We have a higher TP of S$0.66, up from S$0.50. We increase FY23e PATMI by 20.7%, as we increase our production forecast by 9.5% to 498,032 DMT. Iron ore prices are expected to remain resilient with higher infrastructure spending by the Chinese government, and slower than expected supply growth from Australia and Brazil. We expect prices to trend around US$150/DMT (Figure 2).
Our TP remains pegged to the industry average, which is 11x FY23e P/E, up from 10x (Figure 3).
Figure 3: Industry peers trading at 11x FY23e P/E
Source: Bloomberg, PSR (Closing prices as at 29 April 2022)
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