Fortress Minerals - Phillip Securities 2021-10-15: Hit By Production Disruptions

FORTRESS MINERALS LIMITED (SGX:OAJ)

Fortress Minerals - Hit By Production Disruptions

Fortress Minerals (SGX:OAJ)'s 2Q22 results were below expectations. 1H22 revenue and PATMI at 39%/34% of our forecasts. Sales volume was lower than expected. ASP of US$141.82/DMT in line with our forecast of US$140/DMT.
Production disruptions at Bukit Besi Mine during Phase 1 nationwide Total Lockdown under National Recovery Plan, which lasted for approximately five weeks.

Downgrade Fortress Minerals to ACCUMULATE with lower target price of S$0.51. Our FY22e PATMI has been lowered by 22% to US$23.9mil as we decrease our sales volume forecast by 8.6% to 455,020 DMT. Iron ore prices are expected to remain weak around US$140/DMT, with continued steel production cuts in China. As such, we lower our ASP forecast to US$120/DMT for FY22e.

Fortress Minerals's 2Q22 revenue was down 23% y-o-y due to a 49% collapse in production. The 48% y-o-y improvement in selling prices offset some of the revenue weakness.

Fortress Minerals's operating cash flow catapulted from US$54k in 2Q21 to US$6.3mil in 2Q22, with the help of lower working capital. FCF turned positive to US$2.2mil, from US$495k, even with capex increasing to US$4.2mil, from US$549k.

Sales volume was negatively impacted by the production disruptions at Bukit Besi Mine. Mining and processing activities have since resumed on 5 July 2021 at 80% capacity. Average unit cost rose due to the fall in production.

Bank borrowings increased from US$166k to US$22.9mil for the acquisition of Fortress Mengapur which was completed in April 2021 and purchase of equipment. Net debt increased further to US$14.7mil since 1Q22.

Fortress Minerals announced on 12 October 2021 that its subsidiary, Fortress Resources Pte Ltd, has entered into a new offtake agreement with a third-party domestic steel mill in Malaysia. Fortress Resources will deliver 375,000 WMT of iron ore to this customer over a 15-month period from 11 October 2021 to 31 December 2022 (3QFY22 to 4QFY23). The total volume of iron ore concentrate delivered in FY21 was 497,369 WMT.

According to China Iron and Steel Association, the country’s steel production has fallen for the third consecutive month since June. However, year-to-dateAug21, steel production was up 5.5% y-o-y. The Chinese government has ordered steel mills to keep annual steel output in 2021 on par with 2020 levels.
China’s 10-day crude steel output dropped from 20.4mil tons for the period of 1-10 September to 19.9mil tons for the period of 11-20 September and to 17.7mil tons for the period of 21-30 September.
The property sector has been facing credit tightening measures, including higher mortgage rates, and stricter measures on property developers, or the “Three Red Lines”. Land sales volumes have declined, and new home sales volumes and values have weakened. Although the growing automotive sector could contribute to steel demand, the impact from the property sector is too huge to ignore. The property sector makes up about 30% of China’s GDP and 30- 35% of China’s total steel consumption. With China’s steel output accounting for 58% of the world’s steel output in 2020, the property sector alone makes up 20% of world steel demand.
As such, we are expecting iron ore prices (65% Fe CFR North China) to remain weak at about US$140/DMT, which is down 50% from peak levels in May 2021.

Following the transition into Phase 2 of the National Lockdown under the National Recovery Programme (NRP), mining and processing activities in Bukit Besi, Terengganu, Malaysia have resumed at the approved worker capacity of 80% on 5 July 2021.
Before this, under the Full Movement Control Order (FMCO), for the whole month of June, mining operations were only allowed to be maintained in a “warm idle” condition, with a 10% workforce capacity.

We have a lower target price of S$0.51 for Fortress Minerals, down from S$0.81. We lower FY22e PATMI by 22%.
Our production forecast is cut by 8.6% to 455,020 DMT. We also factor in weaker iron-ore prices, lowering ASPs by 14% to US$120/DMT. Iron ore prices have fallen about 50% from the peak at US$260/DMT. Spot prices are currently US$150/DMT.
Our target price remains pegged to the industry average, which is now 8x P/E, down from 10x.
See

Vivian Ye Phillip Securities Research | https://www.stocksbnb.com/ 2021-10-15

SGX Stock Analyst Report ACCUMULATE DOWNGRADE BUY 0.510 DOWN 0.810