AUSTRALIA FMG AU Price (at 5:1, 5 Mar 215 GMT) Neutral A$2.29 Valuation A$ 2.6 - DCF (WACC 1.%, beta 1.4, ERP 5.%, RFR 3.8%, TGR 2.6%) 12-month target A$ 2.6 12-month TSR % +16. Volatility Index High GICS sector Materials Market cap A$m 7,131 3-day avg turnover A$m 45.6 Number shares on issue m 3,114 Investment fundamentals Year end 3 Jun 214A 215E 216E 217E Revenue m 11,611 9,42 8,519 8,737 EBIT m 4,564 1,678 954 675 Reported profit m 2,74 835 349 134 Adjusted profit m 2,671 835 349 134 Gross cashflow m 3,636 2,246 1,848 1,699 CFPS 116.3 72.1 59.4 54.6 CFPS growth % 74. -38. -17.7-8.1 PGCFPS x 1.5 2.5 3. 3.3 PGCFPS rel x.16.26.34.39 EPS adj 85.4 26.8 11.2 4.3 EPS adj growth % 64.4-68.6-58.1-61.6 PER adj x 2.1 6.7 16. 41.6 PER rel x.12.4 1.1 2.81 Total DPS 18.4 7.5 3.9 2.5 Total div yield % 1.3 4.2 2.2 1.4 Franking % 1 1 1 1 ROA % 21. 7.7 4.6 3.3 ROE % 41.6 1.7 4.3 1.6 EV/EBITDA x 2.4 4.2 5.3 5.8 Net debt/equity % 94.4 92.1 9.5 91.7 P/BV x.7.7.7.7 FMG AU vs ASX 1, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 215 (all figures in USD unless noted, TP in AUD) 5 March 215 Macquarie Securities (Australia) Limited Tucking in the security blanket Event FMG has announced it has launched a major debt restructure that could push back its largest debt repayment beyond 22. Impact New debt offering could remove the 217 and 218 repayments: FMG has announced it has launched a new US$2.5bn Senior Secured debt issue to holders of its 217, 218 and 219 Senior Unsecured Note holders. If successful, the new facility could replace the US$1.bn 217 note, the US$4m 218 note and up to US$7m of the US$1.5bn 219 note. Pushing back the due date on the major debt: In addition to the new US$2.5bn Senior Secured debt issue, FMG has announced it plans to extend the maturity of the US$4.9bn Senior Secured Credit facility from 219 to beyond mid 221. Only one major repayment this decade: If FMG is successful in undertaking the debt restructure the company will have only a US$8m repayment due in 219 with all other debt repayments due beyond 22. At the end of December the company had US$1.6bn in cash and could raise a further US$4m from this debt restructure. Iron-ore price weakness remains a concern for the stock: Iron-ore prices have not rebounded post Chinese New Year, weakening to below US$6/t for the first time. FMG s debt restructure has removed concerns over its ability to meet debt payments in the near-term, however the declining iron-ore price is likely to continue to put pressure on FMG s share price. All in costs forecast to move to US$45/dmt: FMG has indicated that further operational efficiencies and cost cutting should reduce its all in cost, which includes interest and sustaining capex, to US$45/dmt. Assuming a 1% discount for FMG s products beyond the usual adjustments, we estimate FMG could be breakeven even if the benchmark price falls to US$54-55/t. Earnings and target price revision No Change. Price catalyst 12-month price target: A$2.6 based on a DCF methodology. Catalyst: Completion of the planned debt restructure presents a material nearterm catalyst for FMG. Action and recommendation Maintain Neutral: The debt restructure is a positive for FMG as it should remove any debt repayment concerns in the near-term. However given the iron-ore headwinds, we remain cautious on the stock, as while FMG can remain cash flow positive if iron-ore prices fall into the mid US$5/t range and has upwards of US$2bn cash buffer, FMG needs higher iron-ore prices than current spot to generate enough cash to eventually repay its debt and deliver the anticipated return to shareholders implied by the current share price. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-2 Macquarie Wealth Management Fig 1 FMG summary financials Fortescue (FMG-AU) Neutral Share price: Target price: 2 4 6 Profit & Loss 1H15A 2H15E 214A 215E 216E 217E Price Assumptions 1H15A 2H15E 214A 215E 216E 217E Sales revenue U$m 4,858 4,544 11,753 9,42 8,519 8,737 Iron ore U$/t 82 73 122 78 66 65 add other income U$m 77-126 77 - - Freight U$/t 7.86 5. 9.39 6.43 6. 7.5 Total revenue U$m 4,935 4,544 11,879 9,479 8,519 8,737 AUDUSD U$/t.9.81.91.85.77.8 less operating costs U$m 3,455 2,873 6,78 6,328 6, 6,428 Iron adjusted unit disc. U$/t -1% -1% -1% -1% -1% -1% less corporate/other U$m 31 32 165 63 66 69 EBITDAX U$m 1,449 1,64 5,636 3,89 2,453 2,24 less exploration expensed U$m 45 - - - - - Production 1H15A 2H15E 214A 215E 216E 217E EBITDA U$m 1,44 1,64 5,62 3,44 2,453 2,24 Iron ore (attributable) mt 75.6 81.1 126. 156.7 168.5 171.3 less dep. & amort. U$m 658 78 965 1,366 1,499 1,565 less other non-cash costs U$m EBIT U$m 746 932 4,655 1,678 954 675 Sales 1H15A 2H15E 214A 215E 216E 217E less finance costs U$m (36) (212) 72 518 455 483 Iron ore (attributable) mt 8.8 81.1 119.8 161.9 168.5 171.3 Pre-tax operating profit U$m 44 72 3,935 1,16 499 191 Iron ore (1%) mt 82.6 83.3 124.1 165.9 173. 175.8 less tax expense U$m (19) (216) (1,18) (325) (15) (57) Net operating profit U$m 331 54 2,755 835 349 134 Reserves add non-recurring items U$m - - (15) - - - Property Life mt Fe SiO2 Al2O3 P LOI Reported profit U$m 331 54 2,74 835 349 134 Christmas Creek 235 97 57.3% 5.17% 2.57%.4% 7.9% Adjusted profit U$m 331 54 2,755 835 349 134 Cloudbreak 232 5 57.6% 4.46% 2.33%.5% 8.3% Kings & Queens 225 729 56.9% 6.5% 2.61%.6% 8.8% EPS (adjusted) Ucps 1.6 16.2 88.3 26.8 11.2 4.3 Firetail 241 174 58.7% 6.58% 2.64%.11% 6.3% EPS Grow th % -81% 52% 53% (7%) (58%) (62%) 7 Debt repayment profile (U$b) DPS (Ordinary & Special) Ucps 3 6 1. 6.2 5. 3.3 6 EFPOWA shares on issue m 3,114 3,114 3,113.8 3,113.8 3,113.8 3,113.8 5 Cashflow Analysis 1H15A 2H15E 214A 215E 216E 217E Cash receipts from operations U$m 5,111 4,242 12,618 9,353 8,1 8,251 less operating costs U$m (3,542) (3,364) (6,22) (6,96) (6,47) (6,477) less interest paid U$m (29) (212) (853) (52) (455) (483) less tax paid U$m (664) (216) (15) (88) (15) (57) add other U$m - - - - - - Cashflow from operations U$m 615 45 5,395 1,65 1,359 1,233 less expl & devlp U$m - - - - - - less PP&E U$m (436) (313) (1,995) (749) (1,256) (1,217) less acq./inv. U$m (142) - 16 (142) - - add divestments U$m - - - - - - less dividends U$m (274) (75) (581) (349) (149) (124) add equity/other U$m (79) - (99) (79) - - add debt movements U$m (526) - (3,92) (526) - - Increase in cash U$m (771) 62 231 (79) (46) (18) Net debt at year end (cash) U$m 7,477 7,415 7,159 7,415 7,461 7,569 Balance Sheet 1H15A 2H15E 214A 215E 216E 217E Cash & cash eq. U$m 1,574 1,636 2,398 1,636 1,59 1,482 Current assets U$m 3,248 3,145 4,477 3,145 3,97 3,4 Fixed assets U$m 18,269 17,873 18,217 17,873 17,631 17,283 Total assets U$m 21,517 21,18 22,694 21,18 2,728 2,323 Current liabilities U$m 2,16 1,89 3,27 1,89 799 819 Total liabilities U$m 13,897 12,97 15,111 12,97 12,479 12,64 Shareholder equity U$m 7,66 8,34 7,569 8,34 8,235 8,245 4 3 2 1 2 18 16 14 12 1 8 6 4 2 Ore shipped (mt) A$2.29 A$2.6 211 212 213 214 215 216 217 218 219 22 Ratio analysis 1H15A 2H15E 214A 215E 216E 217E NPV @ WACC of 1.25% ND/ND+E % 49.6% 48.% 49.6% 48.9% 48.3% 46.7% Producing assets U$m A$/sh % NPV Interest cover x 2.6x 4.2x 6.2x 3.3x 2.x 1.3x Pilbara 16,186 5.97 23% Dividend payout ratio % 31% 3% % % % % Prepayments (1,333) (.49) -19% ROA % 3% 4% 3% 1% 1% 3% Iron Bridge - - % ROE % 4.4% 6.4% 4.4%.% -1.1% 2.7% Developing assets ROIC % 3.5% 4.3% 21.6% 7.6% 4.3% 3.% Western Hub Effective tax rate % 25% 3% 3% 28% 3% 3% Other exploration EBITDA margin % 28% 36% 47% 32% 29% 26% Financial assets EBIT margin % 15% 2% 39% 18% 11% 8% Corporate overheads (657) (.24) -9% Free cash flow U$m 18 137 4,3 245 13 16 Cash from acq/div - - % Net Debt (7,159) (2.64) -12% Valuation 1H15A 2H15E 214A 215E 216E 217E Rehabilitation provisions - - % EV/EBITDA ratio x. x. x. x. x. x. x Risked NPV 7,37 2.6 P/E ratio x 16.8 x 11. x 3.1 x 6.7 x 15.9 x 41.5 x Shareprice prem/(disc) to NPV -12% FCF yield % 1.7% 2.4% 38.9% 28.6% 2.6% 3.2% - core NPV per share (A$) 2.6 Dividend yield % 1.3% 2.7% 4.4% 4.4% 2.7% 2.2% - risked NPV per share (A$) 2.6 Price/book x.9 x.9 x 1.3 x.9 x.9 x.9 x - unrisked NPV per share (A$) 2.6 Source: Company data, Macquarie Research, March 215 5 March 215 2
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a reasonably negative view on Fortescue Metals Group. The strongest style exposure is Valuations, indicating this stock is underpriced in the market relative to its peers. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 175/254 Global Alpha Model Sector Rank % of BUY recommendations 17% (4/23) Number of Price Target downgrades 13 Number of Price Target upgrades 8 Attractive Quant Rank within Country Rank within Sector Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. The rankings are displayed relative to the sector and country. Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score..2.2 -.3-1.1 -.5 -.6-3. -2. -1.. 1. 2. 3. -1% -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple..1.5. -.3 -.5.5-3. -2. -1.. 1. 2. 3. -1% -5% % 5% 1% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. BPS Growth FY1 Sales Growth FY1 Capex Growth 25d Volatility Turnover(USD) 125 Day Interest Cover Earnings Stability Turnover (USD) 25 Day -25% -26% Negatives Positives -19% -2% 25% -3% -2% -1% % 1% 2% 3% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and country Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score -.58 2.9.57.74-1.22-1.61 -.19.27-1.23 -.73.75 Percentile relative to sector(/254) Percentile relative to country(/24) 5 1 5 1 1 1 For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 5 March 215 3
Macquarie Wealth Management Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie First South - South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 214 AU/NZ Asia RSA USA CA EUR Outperform 51.8% 58.6% 45.7% 44.42% 6.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients) Neutral 31.8% 27.37% 3.99% 5.1% 35.37% 33.51% (for US coverage by MCUSA, 3.8% of stocks followed are investment banking clients) Underperform 16.39% 14.57% 23.94% 5.48% 4.8% 19.68% (for US coverage by MCUSA,.44% of stocks followed are investment banking clients) FMG AU vs ASX 1, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, March 215 12-month target price methodology FMG AU: A$2.6 based on a DCF methodology Company-specific disclosures: FMG AU: Mark Barnaba, Chairman of Macquarie Group, WA is a non executive director of Ltd. Dr Geoff Raby, Vice Chairman, Macquarie Group China, is an Independent Director on the board of Fortescue Mining Group Ltd. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Date Stock Code (BBG code) Recommendation Target Price 17-Feb-215 FMG AU Neutral A$2.6 15-Jan-215 FMG AU Neutral A$2.45 9-Sep-214 FMG AU Neutral A$4.4 2-Aug-214 FMG AU Neutral A$5. 17-Jul-214 FMG AU Neutral A$4.9 24-Jun-214 FMG AU Outperform A$4.85 16-May-214 FMG AU Outperform A$5.5 2-Feb-214 FMG AU Outperform A$6.3 5-Nov-213 FMG AU Outperform A$6.15 19-Sep-212 FMG AU Outperform A$4.1 5-Sep-212 FMG AU Outperform A$6.7 24-Aug-212 FMG AU Outperform A$7. 18-Jul-212 FMG AU Outperform A$7.6 17-May-212 FMG AU Outperform A$7.7 13-Mar-212 FMG AU Outperform A$7.8 Target price risk disclosures: FMG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. A$ strength vs the US$ is a key risk as costs and capital expenditure are denominated in A$, while product prices are denominated in US$. The company has senior unsecured debt of US$7bn; this potentially leaves interest service risk should markets turn down unexpectedly or operations be hampered unexpectedly. 5 March 215 4
Macquarie Wealth Management Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 31862) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 2 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 2 574 923, AFSL No. 23754) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 8 583 542, AFSL No. 23752) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 5 March 215 5