Fortress Minerals - Phillip Securities 2021-04-26: Continued Outperformance

FORTRESS MINERALS LIMITED (SGX:OAJ)

Fortress Minerals - Continued Outperformance

Fortress Minerals (SGX:OAJ)'s 4QFY21 results beat, with FY21 revenue and PATMI at 122%/116% of our forecasts. Volume sales growth of 66.7% y-o-y in 4QFY21 exceeded our +12.8%. Gross margin of 78.6% and ASP of US$120.70/DMT also beat our forecasts of 74.3% and US$96.00/DMT.
Fortress Minerals's 4QFY21 PATMI tripled y-o-y to US$6mn from higher selling prices and an 18% decline in unit production costs.
Maintain BUY on Fortress Minerals with higher target price of S$0.64 from S$0.47 as we roll over our 11x P/E target to FY22e, still in line with industry average.

Iron ore concentrates sold increased 66.7% y-o-y by volume in 4QFY21 and 67.9% in FY21. This lifted Fortress Minerals's revenue by 111.6% in 4QFY21 and 84.1% in FY21. Q-o-q, volume sold and revenue were higher by 60.2% and 68.3% respectively.

Fortress Minerals's gross profits more than doubled from US$5.5mn in 4QFY20 to US$13.6mn in 4QFY21. Gross profit margins rose from 67.1% to 78.6%. This was achieved with higher realised ASPs of iron ore concentrates, which went from US$92.83/DMT in 4QFY20 to US$120.70/DMT in 4QFY21. Unit costs also decreased from US$25.32/WMT to US$20.70/WMT with the help of efficiency gains.

Operating cash flow turned from a negative US$11k in 4QFY20 to a positive US$2.7mn in 4QFY21. Fortress Minerals's 4QFY21 FCF remained a negative US$4.2mn vs -US$478k in 4QFY20 from a spike in capex. Full year, FCF increased to US$7.1mn from US$4.8mn in FY20.

Capex jumped from US$390k in 4QFY20 to US$3.6mn in 4QFY21, as Fortress Minerals expanded its truck fleet and reinvested in its Bukit Besi mine for further exploration works.

According to the World Steel Association, global crude steel production increased by 10.0% to 486.9mn tonnes in the first three months of this year. This spurred continued growth in demand for iron ores. World Steel forecasts that steel demand will grow by 5.8% in 2021 to 1.874bn tonnes, after dipping by 0.2% in 2020.
China’s attempts to cut steel output in 2021 have apparently tripped. According to the China Iron and Steel Association, steel production in March 2021 increased 19.1% y-o-y to 94.0mn tonnes. Production was 91.3mn tonnes in December 2020. In April 2021, seven steel companies in Hebei province had to be asked to cut production by 30-50% from March to December 2021.
Elsewhere, iron ore supply from Brazil, the world’s largest supplier, has been made uncertain by inclement weather. This bumped up iron ore prices to a 10-year high. We expect prices to remain above US$110/DMT. Current prices are about US$170/DMT.
Malaysia’s production of iron and steel bars and rods drifted down in 4Q20 but production has since risen. It increased by 4.3% m-o-m in January and 16.0% in February. This could be attributed to the Malaysian government’s increased resources for the construction sector, as the economy tries to stage a recovery from the pandemic.

Fortress Minerals completed its acquisition of the entire issued and paid-up share capital of the Monument Mengapur Group (MMSB) on 7 April 2021. Commercial production is expected to start in FY23e. We have not factored in contributions from the Mengapur site.

We have a higher target price of S$0.64 for Fortress Minerals.
Our FY22e PATMI forecast has been raised by 27% to US$21.8mn as we increase our production forecast by 12% to 498,032 DMT as we forecast higher production volume from sustained growth in demand from Malaysian steel mills, coupled with strong iron ore prices..Iron ore prices are expected to remain elevated with a rebound in steel production and supply disruptions.
We expect Fortress Minerals’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$102/DMT, increased from US$98/DMT.
We continue to peg Fortress Minerals at 11x FY22e P/E, the industry average. Maintain BUY with catalysts expected from increase in production and strong iron ore prices.
See Fortress Minerals Share Price; Fortress Minerals Target Price; Fortress Minerals Analyst Reports; Fortress Minerals Dividend History; Fortress Minerals Announcements; Fortress Minerals Latest News.

Vivian Ye Phillip Securities Research | https://www.stocksbnb.com/ 2021-04-25

SGX Stock Analyst Report BUY MAINTAIN BUY 0.64 UP 0.490