Fortress Minerals - Phillip Securities 2022-05-03: Lower Ore Production But Outlook Turning Positive


Fortress Minerals - Lower Ore Production But Outlook Turning Positive

  • Fortress Minerals (SGX:OAJ)'s 4Q22 results were below expectations. Revenue and PATMI were at 12%/6% of our FY22e forecasts. 4Q22 sales volume decreased 72.2% y-o-y due to lower operating capacity caused by the spread of the Omicron variant among workers and unfavourable weather conditions.
  • Upgrade Fortress Minerals to BUY with a higher target price of S$0.66, up from S$0.50 as we roll over our 11x P/E target to FY23e, and remains pegged to the industry average, up from 10x previously. Our FY23e PATMI has been increased by 20.7% to US$22.3mil, as we increase our production forecast by 9.5% to 498,032 DMT.
  • Iron ore prices are expected to remain resilient with higher infrastructure spending by the Chinese government, and slower than expected supply growth from Australia and Brazil.

The Positives

Stronger cash flows.

  • On a full-year basis, Fortress Minerals's free cash flows surged 113% y-o-y to US$15.1mil, largely due to lower trade receivables.

The Negatives

Lower sales volume.

  • Revenue and PATMI dropped 70% and 83% y-o-y respectively, due to lower sales volume which dropped 73% y-o-y. This could be attributed to lower capacity due to the spread of the Omicron variant and unfavourable weather conditions. Revenue and PATMI for FY22 dropped 9% and 21% y-o-y respectively.

Net cash to net debt.

  • Fortress Minerals recorded net debt of US$15.2mil in FY22, as compared to net cash of US$5.8mil in FY21. This is due to new bank borrowings of US$23.3mil, mainly used to finance the acquisition of Fortress Mengapur and lower profit after tax recorded in FY22.


Demand for iron ore.

  • According to the World Steel Association, year-to-Mar22, global crude steel production decreased 5% to 458.7mil tons. In 1Q22, China’s crude steel production was down 8.4% y-o-y to 245.0mil tons.
  • The National Development and Reform Commission has pledged to continue cutting steel output for 2022. According to the China Iron and Steel Association, the country met the target of controlling steel output last year at 1.035bn tons, down 3% y-o-y. In 2022, steel demand from the real estate sector is expected to slow down but infrastructure investment is expected to pick up.
  • Another factor which would be hampering low-grade iron ore demand growth would be the road to decarbonisation of China’s steel industry. This includes producing more steel from electric arc furnaces (EAF), which could use half as much energy as blast furn aces and only emits 25% of carbon dioxide. In the 14th 5-year plan, China has set a goal of EAF-produced steel accounting for 15-20% of national steel output. In 2020, EAF-produced steel only accounted for 9.2% of total steel output. This would support the demand for high-grade iron ore which has less impurities.

Supply of iron ore.

  • To reduce reliance on iron ore imports, China would be increasing their iron ore production levels. Year-to-Mar22, iron ore production was up 19% y-o-y to 250.5mil tons.
  • Supplies from the world’s two largest iron ore exporting countries have not been keeping pace. Year-to-Apr22, Brazil iron ore exports was down 8% to 76mil tons. Year-to-Feb22, Australia iron ore exports was up 2.7% to 135mil tons.
  • The Russia-Ukraine conflict would have minimal impact on China’s iron ore supply. Imports from these two countries accounted for 2.3% of China’s total iron ore imports, while Australia and Brazil accounted for 62% and 21% respectively.

Upgrade to BUY with higher target price of S$0.66, from S$0.50

Vivian Ye Phillip Securities Research | https://www.stocksbnb.com/ 2022-05-03
SGX Stock Analyst Report BUY UPGRADE ACCUMULATE 0.66 UP 0.500