The Positives
+ Steady increase in volume. Iron-ore concentrates sold increased 61.6% YoY in 1QFY22. This lifted revenue by 143.8%. QoQ, volume sold and revenue were down 19.2% and 0.3% respectively, mainly due to seasonality.
+ Spike in margins. Gross profits almost tripled from US$5.0mn in 1QFY21 to US$13.9mn, with gross profit margins up from 71.1% to 80.5%. This was achieved with higher realised ASPs for iron-ore concentrates, which went from US$94.97/DMT in 1QFY21 to US$143.00/DMT. Unit costs climbed from US$24.88/WMT to US$25.55/WMT, mainly due to RM strength against the US$.
+ Operating cash flow increased. Operating cash flow catapulted from US$1.6mn in 1QFY21 to US$9.3mn in 1QFY22, with the help of higher profits before tax. FCF also increased from US$1.4mn in to US$9.2mn.
The Negative
– From net cash to net debt. Bank borrowings increased to US$22.8m for financing its acquisition of Fortress Mengapur in January 2021. From net cash of US$9.4mn in 1QFY21, the company booked net debt of US$10mn in 1QFY22. Still, we are expecting a net-cash position for the full year of FY22e, on the back of higher cash from higher net profit on a full-year basis.
Outlook
Demand for iron ores. According to the World Steel Association, global crude steel production increased 13% to 826.2mn tonnes in the first five months of this year. This spurred demand for iron ores. World Steel forecasts that steel demand will grow by 5.8% in 2021 to 1.874bn tonnes, after dipping 0.2% in 2020, and further grow by 2.7% in 2022 to 1.924.6bn tonnes.
China has been struggling to cut steel production in 2021 without much success. According to World Steel, its steel production in the first five months 2021 rose 11.8% YoY to 464.6mn tonnes. Production was 99.5mn tonnes in May 2021, up 7.8% YoY.
There are also uncertainties in global iron-ore supply. In 1Q21, major Brazilian iron-ore producer, Vale, recorded 28.4% QoQ decline in iron ore sales, due to operational issues and maintenance at its S11D mine.
As such, we expect prices to remain above US$140/DMT. Current prices are about US$200/DMT.
Other updates
MCO 3.0. Malaysia was placed under MCO 3.0 from 1 June to 28 June 2021. This affected mining at FML’s Bukit Besi mine. Thereafter, its government extended MCO indefinitely until certain benchmarks are met.
On 5 July 2021, certain states such as Terengganu and Pahang, where FML’s mines are located, moved to Phase 2 of a 4-phase National Recovery Plan. Parameters for transitioning to the different phases of the National Recovery Plan will be applied at the state level, to allow individual states where local Covid cases have been stable to transition earlier.
With this, mining at Bukit Besi resumed at an approved worker capacity of 80% on 5 July 2021. Mining has since gradually returned to normalcy.
Fortress Mengapur. FML maintains its target of commencing iron-ore production at Mengapur by end-FY22e. Contributions from Mengapur have not been factored in.
Maintain BUY with higher TP of S$0.81, from S$0.64
We have a higher TP of S$0.81, up from S$0.64. Our FY22e PATMI has been raised by 41% as we incorporate stronger iron-ore prices. We expect FML’s production to increase 10% in FY22e and iron ore prices (Platts Iron Ore Index, IODEX 65% Fe CFR North China) to remain elevated. Our FY22e iron-ore ASP forecast is US$140/DMT, up from US$102/DMT. Spot prices are currently US$210/DMT.
We continue to peg the stock at the industry average, which is now 10x FY22e PE, down from 11x previously. Maintain BUY with catalysts expected from an increase in production and strong iron-ore prices.
