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Date : 25/06/2024

Fortescue Ltd (ASX: FMG): Assessing the FY25 Outlook

Over the past month, Fortescue Ltd (ASX: FMG) has seen its share price decline by 20%. This significant drop has raised questions among investors about whether now is a good time to invest in Fortescue shares. With the company’s market capitalisation lowered, the potential for better value exists, but what does the FY25 outlook hold?

One of the primary reasons for the recent dip in Fortescue’s share price is the fall in iron ore prices. Since the end of May, the price of iron ore has dropped from US$117 per tonne to US$107 per tonne. This decline poses a substantial challenge for mining companies like Fortescue. While mining costs generally remain stable month-to-month, a decrease in commodity prices can drastically reduce revenue and, consequently, net profit.

Fortescue Ltd Performance and Forecast

FMG: The Volatility of Commodity Prices

Predicting the future of commodity prices, including iron ore, is notoriously challenging. These prices are subject to unpredictable fluctuations and cyclical trends. Current economic data from China, a significant iron ore consumer, suggests a bleak outlook.

Trading Economics recently reported a 3.9% year-over-year decline in house prices across 70 Chinese cities in May, the largest drop since 2015. Additionally, ‘fixed asset investment’ was lower than expected, highlighting the ongoing struggles in the Chinese property market and a general reluctance among consumers to purchase real estate.

FMG: Chinese Market Dynamics

Chinese officials are taking steps to reduce the country’s growing housing inventory instead of providing financial support to struggling property developers. These developers are among the world’s largest steel users, and their financial difficulties can ripple through the iron ore market.

Moreover, there is muted industrial demand in China, further compounding the challenges for iron ore. The expectation was that increased manufacturing growth would drive demand for infrastructure-related steel, offsetting the downturn in construction. However, this hope has yet to be realised.

FMG: Potential for a Price Rebound

Despite these challenges, the iron ore price has rebounded several times after falling to approximately US$100 per tonne over the past five years. While past performance is not a reliable indicator of future outcomes, it provides historical context.

Trading Economics’ macro models and analyst expectations show that the iron ore price could reach US$126 per tonne within the next 12 months. If this projection materialises, it could significantly boost Fortescue’s profitability and enable the company to pay larger dividends.

FMG: FY25 Financial Projections

Our analysts have a more conservative outlook on iron ore prices and have released their expectations for Fortescue’s financial performance in FY25. We anticipate that the iron ore price will average around US$113 per tonne for the rest of 2024. Based on this forecast, we project Fortescue’s revenue to be US$17.1 billion, with a net profit after tax (NPAT) of US$5.3 billion in FY25. This would represent a 15% decline in profit year-over-year. Additionally, we predict that the dividend per share could drop by more than 23% year-over-year to A$1.28 per share.

FMG: The Role of Green Hydrogen

Fortescue’s efforts to produce green hydrogen are not expected to have a significant impact by FY25. The company’s green energy initiatives are still in the early stages and may not contribute materially to its financial performance in the near term.

FMG: Factors Influencing Financial Outcomes

The financial outcomes for Fortescue in FY25 are heavily dependent on the iron ore price. If the price of iron ore turns out to be stronger than expected, Fortescue’s financial performance could exceed our predictions. However, this scenario would likely require an uptick in demand from China, which remains uncertain at this stage.

Conclusion

The FY25 outlook for Fortescue shares presents a mixed picture. On the one hand, the recent decline in iron ore prices and the economic challenges in China pose significant headwinds. On the other hand, historical trends suggest the potential for a price rebound, which could enhance Fortescue’s profitability and dividend payouts.

Investors considering Fortescue shares must weigh these factors carefully. While the current lower share price may offer a buying opportunity, the uncertainties surrounding the iron ore market and Chinese demand should be considered. Fortescue’s future performance will hinge on these dynamic variables, making it essential for investors to stay informed and agile in their decision-making.

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