Shares in Fortescue Metals (FMG) plunged sharply yesterday as the slide in stockmarkets (especially in China) overcame any encouragement investors could find in what was a weak 2014-15 earnings report that contained the surprise news of a small dividend payment.
Fortescue shares were near the all time low of $1.61 closing at $1.635, down 14%. in one of its biggest ever one day falls.
The 9% rout on Chinese markets didn’t help – nor did the near rout seen elsewhere, including Australia, Hong Kong and Japanese markets and expectations of more overnight in Europe and the US.
Fortescue is a victim of its high dependence on the Chinese steel market for its sales and future viability.
Not helping its case (nor that of hundreds of other companies large and small around the world with similar concerns around them about their exposure to China – mighty Apple is included in the list) – was the lowest reading on Chinese manufacturing activity in six years that was released on Friday.
That, along with wobbly share prices elsewhere and then the latest sell-offs in Chinese shares, haven’t helped confidence.
Friday night’s big sell-off in Europe and the US set us up for a big slide yesterday (and for the shares of companies like Fortescue) and the latest plunge in China added to the selling pressures as the day went on.
So it’s no wonder vulnerable companies like Fortescue fell heavily.
FMG 5Y – Fortescue facing ‘challenging’ environment
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Fortescue said net profit plunged a massive 88% to $US316 million, and well short of analysts’ expectations of $US417 million.
Revenue tumbled to $8.57 billion, from $US11.75 billion the year before as the company’s iron ore prices fell sharply over the year.
Underlying earnings more than halved to $US2.5 billion ($A3.43 billion) in the year ended June 30 from the year-earlier figure of $US5.6 billion
Even though Fortescue has said repeatedly that it has been cutting costs (which it has and sacking hundreds of people) the market remains sceptical of its future ability to remain viable.
Investors have ignored its loud campaign against competitors such as BHP Billiton and Rio Tinto for dumping iron ore into global markets, especially China.
Yesterday’s rout and small sell-off last week have hammered the shares of its rivals as well, but not to the same degree as that experienced by vulnerable Fortescue.
Not even news of a sharp cut in investment spending this year – to just $US626 million from nearly $US2 billion in the year to June, could offset market fears about the company.
In a statement to the ASX, CEO Chief executive Nev Power said, "In a challenging environment of lower iron ore prices, this focus on efficiency and productivity from our world class assets will continue to see operational improvements and cost reductions….Our successful debt refinancing, closing cash balance of US$2.4 billion and sustained operational efficiency and productivity gains have delivered solid operating cashflows, further strengthening Fortescue’s balance sheet.” The market wasn’t listening yesterday.
It said yesterday its break-even price – the price at which it is not making or losing cash – is $US39 a tonne. The benchmark iron ore price is around $US56. That’s down about 40% over the past year and a bit.
The 2 cents a share final dividend didn’t help investor sentiment, especially after everyone realised it gave chairman Andrew Forrest a $20 million payout on top of the $30 million (3 cents a share interim payment earlier in the year).
The 5 cents for the year is one quarter of 2013-14’s 20 cents a share. There’s a feeling Fortescue should be conserving cash, not paying out to the benefit especially to the biggest shareholder.
Mr Power defended the dividend payout in comments at a briefing.
He said said the size of the dividend was “modest”.
"We want to recognise that we have ongoing shareholders who continue to support the company long term, it is a relatively small amount in the scheme of things, particularly with the generation of over $US2 billion in cash from operating cashflows," he said.
"We think it is very important to demonstrate our confidence in the long term demand and the long term financial success of our company and our ability to continue reducing costs to meet the market."
The company has debt of $US7.2 billion, but the first payment isn’t due until mid 2019.
