Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

Fortescue’s fiscal 2017 second-quarter iron ore shipments of 42.2 million tonnes were broadly in line with recent periods and our expectation. We maintain our AUD 2.80 per share fair value estimate. We retain our no-moat rating. Fortescue lacks a cost advantage, reflecting rapid and expensive expansion during the boom and the lower-grade fines product, which sells at a discount to the benchmark. We forecast a return on invested capital of 16% in fiscal 2017, but we think it’s unlikely to persist as the iron ore market comes back into balance. Fortescue remains overvalued, in our view. The main catalyst for a retracement is a lower iron ore price as new supply comes on line and China’s steel demand peaks.At the current AUD 6.80 share price, Fortescue’s shares trade at 1.7 times the book value of equity. To put it another way, the market is capitalising Fortescue at AUD 151 per tonne of productive iron ore capacity. This is above the original China boom time inflated cost to building the greenfield mine, rail and port capacity. In addition, new iron ore capacity can be added more cheaply than China boom levels, particularly incremental expansions for the larger producers such as <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1">BHP Billiton Limited (BHP AU)</a>, <a href="https://www.smartkarma.com/entities/13" target="_blank" data-smartkarma-citation="entities:13:1">Rio Tinto Ltd (RIO AU)</a> and <a href="https://www.smartkarma.com/entities/23731" target="_blank" data-smartkarma-citation="entities:23731:1">Vale SA (VALE US)</a>.Analyst: Mathew Hodge

Fortescue’s fiscal 2017 second-quarter iron ore shipments of 42.2 million tonnes were broadly in line with recent periods and our expectation. We maintain our AUD 2.80 per share fair value estimate. We retain our no-moat rating. Fortescue lacks a cost advantage, reflecting rapid and expensive expansion during the boom and the lower-grade fines product, which sells at a discount to the benchmark. We forecast a return on invested capital of 16% in fiscal 2017, but we think it’s unlikely to persist as the iron ore market comes back into balance. Fortescue remains overvalued, in our view. The main catalyst for a retracement is a lower iron ore price as new supply comes on line and China’s steel demand peaks.At the current AUD 6.80 share price, Fortescue’s shares trade at 1.7 times the book value of equity. To put it another way, the market is capitalising Fortescue at AUD 151 per tonne of productive iron ore capacity. This is above the original China boom time inflated cost to building the greenfield mine, rail and port capacity. In addition, new iron ore capacity can be added more cheaply than China boom levels, particularly incremental expansions for the larger producers such as BHP Billiton Limited (BHP AU), Rio Tinto Ltd (RIO AU) and Vale SA (VALE US).Analyst: Mathew Hodge

Solid Second Quarter for Fortescue; AUD 2.80 Fair Value Maintained

Fortescue Metals

Solid Second Quarter for Fortescue; AUD 2.80 Fair Value Maintained