Fortress Minerals - Phillip Securities 2022-01-19: Bogged Down By Weaker Iron Ore Prices

FORTRESS MINERALS LIMITED (SGX:OAJ)

Fortress Minerals - Bogged Down By Weaker Iron Ore Prices

Fortress Minerals (SGX:OAJ)'s 3Q22 results were below expectations. Revenue and PATMI were at 20%/12% of our FY22e forecast as ASPs were lower than expected.
3Q22 sales volume increased 35.3% y-o-y. Unit costs decreased accordingly.

Maintain ACCUMULATE on Fortress Minerals with a lower target price of S$0.50, down from S$0.51. We lower FY22e PATMI by 29.6%, factoring in weaker iron ore prices and higher operating expenses. We lower ASPs by 8% to US$110/DMT. Our target price remains pegged to the industry average, which is now 10x FY22e P/E, up from 8x previously.

Iron-ore concentrates sold increased 35.3% y-o-y in 3Q22. Revenue was lifted by 7.3% y-o-y, even with weaker iron ore prices in 3Q22.

Gross profits increased marginally 6.6% y-o-y. This was achieved with lower average unit cost, which dropped from US$25.26/WMT in 3Q21 to US$20.22/WMT, in spite of ASPs that fell from US$110.06/DMT in 3Q21 to US$87.44/DMT, in line with weaker iron ore prices.

Revenue increased on a y-o-y basis, but PATMI fell 34.5% due to higher selling and distribution expense and other operating expenses that almost doubled to US$4.2mil. This was due to higher ocean freight charges for export sales and royalty and commission expenses.

Operating cash flow decreased from US$11.7mil to US$6.4mil, due to lower profit after tax and higher levels of trade receivables and inventories. Free cash flow also decreased from US$10.5mil in 3Q21 to US$4.8mil in 3Q22.

According to the World Steel Association, year-to-date as of Nov21, global crude steel production increased 4.5% to 1.7bn tonnes. However, it has been slowing in 4Q21, led by reduction of steel production in China. According to the China Iron and Steel Association, China’s steel output declined in 2021, producing an estimated 1.03bn tons of steel, which is down 3% y-o-y.
Total steel demand in 2022 is expected to remain at similar level as 2021, with the real estate sector expected to slow down but infrastructure investment is expected to pick up. The concentration rate of steel mills in China is expected to increase, as the smaller steel mills are acquired by the larger ones.

Vale, the largest Brazilian iron ore producer, announced on 29 November 2021, that it would produce 315mil-320mil metric tonnes of iron ore in 2021. On January 10 that the company was maintaining its 320mil-325mil metric tonnes guidance for 2022. Rio Tinto, Australia’s largest iron ore producer, guided for exports of 320mil-335mil metric tonnes. Iron ore shipments in 2021 totalled 321.6mil metric tonnes.
We are expecting Vale to lead the supply growth of higher grade iron ore, of 65% and above. With the emphasis on energy-consumption standards, we also expect demand for high-grade iron ore to remain resilient.
Iron ore prices have been recovering from November lows, and are expected to remain around US$150/DMT.

We have a lower target price of S$0.50 for Fortress Minerals, down from S$0.51. We lower FY22e PATMI by 29.6%. We factor in weaker iron ore prices, lowering ASPs by 8% to US$110/DMT and higher operating expenses. Our production forecast remains unchanged. Iron ore prices have recovered from the lows in November 2021, and are trending around US$150/DMT.
Our target price for Fortress Minerals remains pegged to the industry average, which is 10x, up from 8x.
See

Vivian Ye Phillip Securities Research | https://www.stocksbnb.com/ 2022-01-19

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 0.50 DOWN 0.510