We’re back with live events in 2024 - get your tickets to Equity Mates Live – Ask An Advisor here.

Investing in Fortescue Metals Group (ASX: FMG) – A Summer Series Analysis

HOSTS Alec Renehan & Bryce Leske|17 January, 2021

Welcome to the Equity Mates Summer Series of 2020 brought to you by Superhero.

Over 12 episodes we dive into some of Australia’s largest and most well-known companies, as selected by you, the Equity Mates community.

In this episode, we take a closer look at Fortescue Metals Group Limited (ASX: FMG) – a leading Australian iron ore company. As the fourth largest iron ore producer in the world after BHP, Rio Tinto, and Vale, Fortescue Metals Group has established itself as a key player in the financial services industry. We delve into the company’s financial performance and growth prospects. Join us as we unpack the potential of investing in Fortescue Metals Group Limited.

In each episode we look at:

  • A company summary
  • The industry
  • Their competition
  • The outlook and future plans
  • Key financials
  • Valuation

For some of the companies, we’ve been lucky enough to get access to the CEO, where we take some of the tough questions straight to them.

Superhero offers unlimited $5 trades on ASX-listed shares. For more information or to sign-up, head to their website here

*******

If you want to let Alec or Bryce know what you think of an episode, contact them here

*****

Some of our favourite resources and offers to help you during your journey:

*****

Make sure you don’t miss anything Equity Mates related by signing up to our email list. And visit this page if you love everything Equity Mates and want to support our work.

*****

Equity Mates Investing Podcast is a product of Equity Mates Media. 

All information in this podcast is for education and entertainment purposes only. Equity Mates gives listeners access to information and educational content provided by a range of financial services professionals. It is not intended as a substitute for professional finance, legal or tax advice. 

The hosts of Equity Mates Investing Podcast are not financial professionals and are not aware of your personal financial circumstances. Equity Mates Media does not operate under an Australian financial services licence and relies on the exemption available under the Corporations Act 2001 (Cth) in respect of any information or advice given.

Before making any financial decisions you should read the Product Disclosure Statement and, if necessary, consult a licensed financial professional. 

Do not take financial advice from a podcast. 

For more information head to the disclaimer page on the Equity Mates website where you can find ASIC resources and find a registered financial professional near you. 

In the spirit of reconciliation, Equity Mates Media and the hosts of Equity Mates Investing Podcast acknowledge the Traditional Custodians of country throughout Australia and their connections to land, sea and community. We pay our respects to their elders past and present and expend that respect to all Aboriginal and Torres Strait Islander people today. 

*****

Have you just started your investing journey? Head over to Get Started Investing – Equity Mates 12-part series with all the fundamentals you need to feel confident to start your investing journey.

Want more Equity Mates? Subscribe to our social media channels (@equitymates), Thought Starters * Get Started Investing mailing list and more, or check out our Youtube channel.

Equity Mates Investing Podcast is part of the Acast Creator Network.

Bryce Leske: [00:00:57] Welcome to the Equity Mates Summer Series of 2020, brought to you by superhero who are offering five dollar brokerage and zero dollar brokerage on ETFs here in Australia over 12 episodes, we're going to be diving into some of Australia's largest and most well known companies as selected by you. The Equity Mates community will be unpacking the company, its industry, the outlooks and key financials, and in some instances will also be taking the tough questions straight to the CEO. To do this, as always, I'm joined by my equity buddy Wren. How's it going, bro? [00:01:27][30.4]

Alec Renehan: [00:01:27] I'm very good, Bryce. I'm looking forward to this episode because it's a little bit different. The Equity Mates community loves a Specky stock. The last episode we did was a three hundred and eighty million dollar biotech company that wasn't profitable. Yes. Now we're going to talk about a 60 billion dollar Australian giant that is profitable. [00:01:50][22.6]

Bryce Leske: [00:01:51] I didn't know Equity Mates was listed. [00:01:52][0.7]

Alec Renehan: [00:01:53] So this would be an interesting one, a company that most people will have heard of and something that is probably on the opposite end of the spectrum. And to some of the other companies we've spoken about like a or a door [00:02:05][11.5]

Bryce Leske: [00:02:06] and one that we have actually not really spoken about on the show at all in too much detail. So looking forward to getting stuck into it. Before we jump into Fortescue Metals ASX ticker, is FMJ. A quick shout out to Daniel from the Equity Mates community, who has done an excellent job with the research and analysis and helping us build out this episode. So thank you very much to Daniel, as always. The structure of this will be a review of the company, its operations, impact of covid, its outlook, financials and then valuation, which we can do because it's profitable. [00:02:41][34.7]

Alec Renehan: [00:02:41] Yes, yes. And I will be a lot of is about the iron ore price and what your forecasts are. And that is going to be central to valuing this company. So I hope I would. I said, oh, [00:02:54][12.4]

Bryce Leske: [00:02:54] yeah, well, I would say that my special skill is forecasting oil prices. [00:02:57][3.8]

Alec Renehan: [00:02:58] So luckily you've come to that saying maybe we should just completely rip off Hamish and Andy and get people to submit their investing special skills. So yours could be forecasting the iron ore price and also predicting which online retail stocks are going to pop and mine could be picking companies. Are they going to lose half their value as my stock of the year? [00:03:20][21.5]

Bryce Leske: [00:03:21] Mine would be being able to guess eight of 10 ASX ticker codes that you shoot my way that would be good anyway. [00:03:31][9.5]

Alec Renehan: [00:03:31] So everyone, Bryce's personal Instagram handle is Bryk Leske. Yes. Dm him. You're investing special skills. And that will be a segment in twenty twenty one. [00:03:42][10.5]

Bryce Leske: [00:03:43] I like it Brick Leske. I guess we're doing it if you want to do. You said we are investing special skill I am available over the summer. [00:03:52][9.9]

Alec Renehan: [00:03:54] Dont do to his personal do to the Equity Mates one. [00:03:57][2.3]

Bryce Leske: [00:03:57] That's just because you want to be involved. Yeah. [00:03:59][1.5]

Alec Renehan: [00:03:59] Well yeah. I don't [00:04:00][0.6]

Bryce Leske: [00:04:01] need everybody to stick around though Brian I, [00:04:03][1.8]

Alec Renehan: [00:04:04] I'm producing names for our Equity Mates account. if you're not signed up to our Equity Mates Instagram, that should be how you start the year off. Right. Start twenty, twenty one off by going to the Equity Mates Instagram and subscribing. [00:04:16][11.9]

Bryce Leske: [00:04:17] Absolutely. So Fortescue Metals, it's a company that has obviously been around for a while. He said it's a 60 billion dollar behemoth and is a global leader in the iron ore industry. Not only is it a global leader in the iron ore industry, though, but it is also recognized for its innovation and leading development in the mining industry. Its mine and mine's in Pilbara in Western Australia, our Pilbara, Pilbara in Western Australia. And it has been able to successfully leverage its innovation and infrastructure to become the lowest cost supplier of seaborne iron ore to China. So if you think about how much iron ore China are buying from Australia and some of the big competitors of Rio and BHP, for it to be the lowest cost supplier puts it in a pretty strong position. [00:05:02][45.6]

Alec Renehan: [00:05:03] Before we get too far into the company. I think if people haven't heard of Fortescue, they've probably heard of its founder, Andrew Forrest, Twiggy Twiggy Forrest question without notice. Why is he called Twiggy? [00:05:15][11.6]

Bryce Leske: [00:05:15] He avoids stay. He he loves Twiggy sticks [00:05:18][3.2]

Alec Renehan: [00:05:21] that I should start that rumor now. It's because he was skinny, apparently, as a kid. All right. Yeah, your answer was better. [00:05:29][8.0]

Bryce Leske: [00:05:31] Fortescue started back in 2003 and has grown to become the fourth largest iron ore producer globally with four operating mines in the Pilbara under two major project areas. And it has production capacity of about one hundred and seventy five million tonnes per annum. And that puts it, I think, is producing seven per cent of total iron ore copper. We'll get into that a bit later on, but it delivers its product through integrated seabourne transportation through Port Hedland and delivers straight through to its major customers in China. One of its largest customers is bound to steel group. Interestingly, they were the first customer for Fortescue and have been a long standing customer of their for the last 10 years. So good on them. Good partnership building by Fortescue or Twiggy. [00:06:20][48.6]

Alec Renehan: [00:06:22] So I think we'll get into this later. But obviously Fortescue is heavily exposed to the Chinese market, both in terms of the iron ore prices driven in many cases by Chinese demand. And Fortescue are primarily selling to Chinese buyers. We're all living through these escalating trade tensions at the moment. So it will be interesting to see how that affects Fortescue going forward. But let's get to that in due course. [00:06:48][26.2]

Bryce Leske: [00:06:49] So in terms of its operations, it runs a number of large mines. We're not going to go into too much detail for all of them. But just to list them, Chichester Chichester Hub is in the heart of the Pilbara. It's a wholly owned mine. They also are involved in one called the Solomon Hub, which is also around a similar area to the Chichester hub, about 120 kilometers west over in Western Australia. They've got a Western hub and then they've also got another one, a joint project called the Iron Bridge Magnetite Project. [00:07:20][31.7]

Alec Renehan: [00:07:21] They do have more projects. I'm going to say, if you want to say all of their projects, Wikipedia has them on or their investor presentations. But yeah, the long and the short of it is that they're an iron ore company, so they're not a diversified miner and the fourth largest iron ore producer in the world after BHP, Rio and Brazil's. [00:07:40][18.9]

Bryce Leske: [00:07:42] Yeah. The other big players in this space. So the question is, before we move on to a bit more detail around their outlook and industry analysis, is the covid impact? You know, we've seen and spoken about a lot of companies in the summer series that have been impacted by covid. Is this a company that has had significant impact from covid? [00:08:02][20.5]

Alec Renehan: [00:08:03] No, actually, surprisingly so. Fortescue avoided a lot of the issues of the pandemic. They obviously had to look at, you know, roster changes and pay for their workers. But the mining operations have remained at full capacity and have their full year guidance to the market around their numbers, their revenue numbers and their profit numbers have remained unaffected. So there's actually been two meaningful benefits for Fortescue out of this whole process. The first one is Brazil's Vale has been more heavily affected than the Australian miners and saw one of Fortescue's major competitors has suffered, which is good for Fortescue. The second one is the iron ore price is quite high at the moment. The iron ore price was really high around late 2011. It fell off to probably last, what, three over three quarters of its value. By 2016. It came back in a big way in sort of mid twenty nineteen fell off again. But 2020 has been a good year for iron ore. And obviously Fortescue was so heavily affected by the iron ore price. We're not in the prediction business here. Well, I guess we kind of are. But generally, when countries go into recession, one of the key things that governments do to try and stimulate the economy is build. You know, they build big infrastructure projects. They throw a lot of money around to try and stimulate the economy, try and create jobs and try and get that demand going again. You know, money in people's pockets from these jobs then stimulates other businesses because they're spending that money. And so the virtuous cycle continues. And so with a lot of these countries currently suffering some pretty serious economic slowdowns because of covered, it wouldn't be a surprise if governments start announcing big infrastructure projects, which should increase demand for steel, which should increase demand for iron ore, which should keep the price high. And there are obviously a lot of other factors supply all that stuff that come into it, but it feels like a net basis. Covid may have actually been a bit of a positive for Fortescue. [00:10:05][122.3]

Bryce Leske: [00:10:06] Yeah, so a bit of a 101 into what iron ore mining actually is. You've probably seen on the TV or in the newspaper or online the huge mines out in the middle of Australia, over in Western Australia, and the vast amounts of black rock that they're digging up. So the iron ore mining industry consists of companies that mine iron bearing ores and or is literally just a natural forming rock that has different minerals within it. And it is up to these mining companies to extract these ores and also process them to create, I guess, a more concentrated form. They blasted in steel furnaces to actually create steel. So that is sort of the supply chain process. And then that steel is. As Ron just said, is used in construction and infrastructure projects, all sorts of things, so they like the raw input to make it all happen. [00:11:00][53.9]

Alec Renehan: [00:11:00] Iron ore plus coal equals steel. [00:11:01][1.4]

Bryce Leske: [00:11:03] There you go. So that's your one 101 one on the iron ore industry. [00:11:05][1.8]

Alec Renehan: [00:11:07] So we've touched on competitors and the industry, but let's go a little bit deeper on that. So I think when you're talking about a commodity business, so Fortescue is a commodity business because iron ore is a commodity. Really, if you're a steel mill, you don't care where you get your iron ore from. There are some differences in quality, but at a high level, iron ore is iron ore. And so really the key thing is the price that iron ore is being sold out because that's what is going to affect your fortunes as an iron ore miner. Think like an oil company, like they can do anything and everything under the sun to try and improve their business. But at the end of the day, the oil price is the most important factor because oil is a commodity. So when you're looking at a commodity business, it's a supply and demand play. And when supply is tight or when demand is massive, that's a great time to be in the business because that's when prices are high and when you can make a lot of money. What happens, though, is that prices generally move in cycles. And if you think about why that's the case, let's say your demand increases. Let's use a real example. In the 2000s, China started building at an unprecedented rate. They needed a lot of steel to build. And so there was a lot of demand for iron ore. And so demand for iron ore went up and steel producers were willing to pay more for that iron ore. And so that was a really good time for the iron ore price. What happens then is people recognize that the price is high and all of a sudden projects that wouldn't have been profitable become profitable because the price is high or more and more people are investing in the sector trying to find new mines because the price is so high, there's an incentive to create more mines, get more projects up that increases the supply of iron ore, and then the price reduces because there's more supply. And so those supply and demand dynamics are critical in these commodity businesses. When we're talking about the demand side of iron ore, we're really starting and finishing the sentence with China. China is the largest importer of iron ore globally. I think it's about 70 percent of global imports go to China or 70 percent of world steel goes to China. And so really, China's appetite dictates the world price. So, yeah, that's really the first thing when we're looking at the industry, you're not actually looking at its competitors. You're looking at who actually wants the stuff, who's buying it. But if you flip it around and you look at the other side of it, you look at the supply side of the industry and we look at Fortescue's major competitors, there's really three other majors, and that's BHP, Rio Tinto and then Brazil's Varly and iron ore mining, I guess mining in general. But iron ore mining we're talking about now is incredibly capital intensive. It costs a lot of money to build a mine staff of mine, get the ore out of the ground and ship it to where it needs to go. It requires really billions of dollars in capital. And so there's a really massive barrier to entry there for new entrants into the market. And so what you have is a I guess, an oligopoly, but you really just have four major or multibillion dollar miners that really dominate the supply of iron ore around the world. [00:14:25][198.2]

Bryce Leske: [00:14:26] So when demand for Australian iron ore over the next five years is anticipated to be four per cent, but you just mentioned there the interplay between supply and demand. And you may remember in 2019, there was a massive dam collapse, the Boom and Dino Dam. That dam was owned by Vale. [00:14:45][19.0]

Alec Renehan: [00:14:45] And I think it's vale. [00:14:46][1.0]

Bryce Leske: [00:14:47] vale sorry. [00:14:47][0.0]

Alec Renehan: [00:14:48] I think I could be wrong. [00:14:49][0.8]

Bryce Leske: [00:14:50] and I was pretty catastrophic. 270 people died as a result of the collapse and it absolutely destroyed the production capacity for Varly, which really, I guess, helped Australian miners because the production capacity would have resulted in reduced supply. However, the supply is starting to come back on over in volume production facilities. So you could imagine that is going to have an impact on the price. [00:15:13][23.6]

Alec Renehan: [00:15:14] It wasn't just fall. It was BHP as well, wasn't it? [00:15:16][2.5]

Bryce Leske: [00:15:17] I don't know if they were directly involved. There's been a number of dam collapses. [00:15:20][3.4]

Alec Renehan: [00:15:21] Yeah, I might be looking at another one. I'm looking at the marinara dam collapse. [00:15:25][4.0]

Bryce Leske: [00:15:25] That was 2015, I think. [00:15:26][1.2]

Alec Renehan: [00:15:27] Yeah, you're right. 2015. Yeah. Actually starting to build, bedded down. [00:15:30][3.5]

Bryce Leske: [00:15:31] Unfortunately, there are too many disasters over there. But anyway, in the short term, there is expected to be some tailwinds for the price of iron ore with the unprecedented stimulus that is coming through as a result of the global pandemic, with infrastructure spending and whatnot really being increased by governments around the world, which you can imagine will have a positive effect on the demand for steel. So. [00:15:52][21.5]

Alec Renehan: [00:15:53] I think one other thing that's worth commenting when we're talking about demand is interest rates have never been cheaper. So money is really cheap for governments and big businesses alike, but mainly governments. When money's cheap, it makes sense to borrow and to build. And so potentially, if this low interest rate environment sticks around for a while, governments will bring forward projects that maybe they have further down the line because they can get money at a cheap rate to build it now. So, yeah, I think increasing infrastructure spend because it covid also increasing infrastructure spend because money is cheap should drive some demand. [00:16:28][35.4]

Bryce Leske: [00:16:29] So again, before we look at the outlook for Fortescue and have a chat about financials, let's have a quick break in here from our sponsors. The outlook for Fortescue, I mean, we've touched on it, you know, we can expect some short term tailwinds because of the covid and increase in expenditure and those sorts of things. Is there anything else worth mentioning, RIM? [00:16:49][19.8]

Alec Renehan: [00:16:49] No, I don't think there's much more that we need to talk about in terms of the outlook. I mean, really, Fortescue is a big business, but not a complex business. It's an iron ore miner. It's heavily exposed to the iron ore price. There's been people that have asked about is Fortescue going to diversify into other areas of mining, other metals, stuff like that. But the CEO, Elizabeth Gaines, has sort of I mean, she's been open to it, but it's sort of been like not on the immediate horizon. You know, if the opportunities there and it makes sense, we might do it. But really, the outlook, Fortescue have a pipeline of mining projects that are in play or they want to put in play to get more iron ore out of the ground and deliver it mainly to China. And so the outlook is going to be to do that. [00:17:39][49.9]

Bryce Leske: [00:17:40] So, again, let's talk about financials. As you mentioned, the performance of the company is heavily tied to the price of iron ore as they're not really diversified outside of mining. Iron ore earnings can be pretty volatile, depending on how the iron ore price is performing. And you really are opening up yourself to commodity risk. So this is one of those companies that really fits into the, I guess, the cyclical companies as iron ore price moves up and down, as does the share price of the company, because people are forecasting what impact the change in price is going to have on their ability to continue to run as the lowest cost producer of iron ore in Australia and also deliver profits for their shareholders. [00:18:20][40.4]

Alec Renehan: [00:18:21] Yeah, so when you're in a commodity business and your price moves in cycles, what's the number one thing you can do? [00:18:28][6.8]

Bryce Leske: [00:18:28] Close your eyes, [00:18:28][0.4]

Alec Renehan: [00:18:29] close your eyes and hope that China buys more. So if you pinch if you think about a commodity business and let's say to use a really simple example, let's say iron ore moves between 50 dollars a tonne and 100 dollars a tonne and you have no real control over that price movement. The best thing that you can do is reduce your costs. So they're always below the 50 dollars a tonne number. So when even when prices are at their lowest, you might not be making as much profit, but you're still making some profit. And then as prices go up, you obviously are just making more profit. And that's something that Fortescue has done in a pretty impressive way. They struggled with that. So as we said earlier, iron ore prices previously peaked in 2011 and then they started coming down and they lost, you know, it was over over 75, over three quarters down by 2016. In 2012, Fortescue really started feeling the pinch. There were a lot higher cost producer than they are now. So for every tonne of iron ore they got out of the ground, it cost sixty nine dollars a wet metric ton. Now, don't worry about wet and dry metric tonnes, but that's just an iron ore terminology. In financial year 2012, it cost them six to nine US dollars, a wet metric ton to get iron ore out of the ground. And they really underwent a massive transformation in their business to reduce that number, to protect themselves in times of low iron ore prices. I guess they've got that down to twenty five dollars a metric ton in financial year 2020. So from 69 now to 25. And they transform their business and they've become the lowest cost operator, but an operator that can really make money in any market environment. And so as a cyclical business, that's that's really what you want to say. [00:20:20][111.1]

Bryce Leske: [00:20:20] Yeah, it's pretty phenomenal. I would love to dig a little deeper to understand exactly what went on during that sort of period between 2012 and sort of 2015. But to drop from almost, you know, 70 million metric tonnes down to 23, it's resulted in Fortescue being an incredibly profitable business. [00:20:36][16.0]

Alec Renehan: [00:20:37] Now, here's the question. So between 2012 and 2017, I went from sixty nine dollars to twenty two dollars. They've gone back up to twenty five points. Should we be worried? [00:20:48][11.1]

Bryce Leske: [00:20:49] Well, look, it's not the Sixty-nine that it was, but our costs are going up. [00:20:54][4.6]

Alec Renehan: [00:20:54] Yeah, I feel like there's two ways to think about it. One is on an absolute basis is that twenty five dollars a tonne less than what you will get from selling that tonne of iron ore. And right now it is, which is great. The second thing is on a relative basis, and if your costs are lower than your competitors, even if you're losing money, you'll be losing less money, which in theory should allow you to last longer. All other things being equal. [00:21:20][25.6]

Bryce Leske: [00:21:20] So not only have they reduced their costs of doing business, they've also been able to increase their processing and production as well as obviously their shipments. So the two together have really delivered some pretty impressive earnings results since that sort of 2012 period. Since then, they've had earnings growth at an annualized rate of 21 percent and dividends have grown at a rate of 47 per cent since FCI 2012. So that's just a net result of the lowering cost of production and increased production and shipments. So, look, strong profitability, good cash flow generation, the ability to, I guess, perform well when iron ore prices are at their lowest point leads to a pretty favorable balance sheet and a company that I will probably pay a bit more attention to. [00:22:09][48.7]

Alec Renehan: [00:22:09] Yeah, I mean, you mentioned balance sheet there in terms of cleaning up their balance sheet. In 2015, they had net debt of nine dollars billion. That's now 300 million. Wow. So they've reduced their costs to produce iron ore massively. They've increased the amount that they're pulling out of the ground their production, and they've really cleaned up their balance sheet and paid off a lot of their debt. I mean, it's been a pretty impressive few years for Fortescue. [00:22:41][31.5]

Bryce Leske: [00:22:42] 300 million is their net debt. Twiggy's 2020 dividend payment was one point one billion. Wow. Yeah. Jay dividend payment. Yeah. [00:22:53][11.5]

Alec Renehan: [00:22:54] He could pay off all the net amount of that debt and still get one of the biggest dividends in Australia [00:23:00][5.9]

Bryce Leske: [00:23:01] because they pay a dollar a share I think was their latest dividend. And I think he owns obviously a billion or so shares maybe. But anyway, they paid [00:23:09][7.9]

Alec Renehan: [00:23:09] a dollar a share dividend. Yeah, that's not bad. Yeah, the share price is, what, eighteen and a half bucks. [00:23:14][5.4]

Bryce Leske: [00:23:15] Yeah. But anyway, Twiggy is doing well for himself. [00:23:17][2.0]

Alec Renehan: [00:23:17] That yield is incredible. [00:23:19][1.2]

Bryce Leske: [00:23:19] It is good yield. Yeah. I will take it offline. Actually had a podcast the other day of a company that has incredible yield. But let's, let's, let's close let's say [00:23:27][8.2]

Alec Renehan: [00:23:30] sorry your days. Everyone with that could reveal if [00:23:33][3.0]

Bryce Leske: [00:23:33] you, if you want to know, hit us up on Instagram [00:23:35][1.8]

Alec Renehan: [00:23:35] with your investing special skills here. [00:23:38][2.8]

Bryce Leske: [00:23:39] Let's turn to valuation because we haven't really discussed how to value a commodities business. So it's very difficult to do given the fact that you really have to try and anticipate the cyclical nature of commodities and the iron ore price over the next five, ten years. So it is difficult, but we have gone about it. [00:23:57][17.9]

Alec Renehan: [00:23:57] The first thing to introduce is when we normally talk about a discounted cash flow, we assume that these businesses are going to be lasting concerns forever. You say what they currently are. You assume a growth rate for the next five or ten years or whatever you want to do, and then you assume a terminal growth rate, which is really an indefinite growth rate. And it's because it's so hard to forecast growth out from a certain period of time. You know, ten years from now, you have no idea what a lot of these companies are doing. So you normally put that growth rate at around inflation, but there's no end date to that cash generation of the business. You expect it to just last forever with mining and mining companies and, you know, oil and gas businesses. You do a discounted cash flow, but it's a little bit different because the end date of their mines or their oil rigs are a little bit more known. The companies have an idea of how much iron ore is in the ground. And they might say, you know, this mine's got another five years life, another ten years life, another thirty years life, whatever it is. But there's a more definitive end date. So when you're doing a discounted cash flow, you take a slightly different approach. And what you do is you project out the cash flow that will be generated over the life of the mine or the asset, whatever it is. So let's take a simple example. Let's say we've got a mine, it's got ten more years life. And we know that every year we'll be able to get a hundred metric tonnes out of the ground. So then you overlay that hundred metric tonnes for the next ten years with what you project the price to be over that ten year period net out there costs to pull that hundred metric tonnes out of the ground every year. And then you can say, well, alright, well, this will be the cash that is generated for each of the years. The mine is still operating. And then what you do is you just do a discounted cash flow on that ten years of cash that's generated. So there's no it's not indefinite. There's a definitive end date. So the exercise is a little bit easier now. We haven't done that for Fortescue. Instead, what we've done is we've relied on analysts to do it for us and we've had a look at some of their discounted cash flows and what they're thinking about, you know, Fortescue's mines that are in operation now that may come into operation in the future and what the value of the future cash discounted back to today is worth given. There's a pretty wide range of estimates on what the iron ore price will do. There's a pretty wide range of valuations out there and some of the more bearish analysts around what they think the iron ore price will do value Fortescue around that thirteen point. Whereas some of the more bullish analysts that think the iron ore price will be really strong in the coming years value Fortescue around the 26 dollar mark. So the range that you sort of say from analysts is between sort of 13 dollars and twenty six dollars. Fortescue is currently trading at eighteen and a half dollars and so 1823 to be specific. So it really sits in the middle of that range. [00:27:00][183.0]

Bryce Leske: [00:27:01] Nice. That was fun. I really enjoyed talking about Fortescue. Certainly going to be paying a little bit more attention to it. It's something, to be honest, that has never really been of interest to me. But this is just a great example of a good company that just keeps plugging away good operators, obviously good management. They know what they're doing and have developed a business that seems to be able to survive pretty well in a cyclical sort of environment. [00:27:25][23.8]

Alec Renehan: [00:27:26] I want some of that one point, one billion dollar dividend, [00:27:27][1.6]

Bryce Leske: [00:27:28] another crazy, crazy. One day, one day. [00:27:30][2.3]

Alec Renehan: [00:27:30] So before we wrap up, I want to ask you a question, because ethical investing is obviously a big focus for the Equity Mates community. It's a big focus for both of us. Other than that gambling stock that you not really talk about, but where does Fortescue fall for you? Unethical, the unethical. [00:27:46][15.4]

Bryce Leske: [00:27:47] You're really putting me into the public light here. It doesn't sit well with me in terms of how I feel about the broader issue of climate change. So I would have to say that it's an unethical company in my eyes. [00:27:59][12.3]

Alec Renehan: [00:27:59] OK, interesting. For me, the gut reaction is the same. Like mining companies from may get groped. Steel production most of the time uses coal and, you know, is carbon intensive. So for those reasons, instant gut reaction, you say unethical, but at the same time, like no one is saying we need to move away from steel wool, even if people were like, do we have a ready-Made alternative to steel? So then I heard back on the side of, well, it's not like a BHP and Rio that are mining coal. It's a company that's only mining iron ore. And then I think maybe it is more ethical. It's definitely more ethical than a coal miner, I would say. [00:28:38][38.3]

Bryce Leske: [00:28:39] Yeah, yeah, yeah, yeah. It's a gray area. [00:28:41][1.9]

Alec Renehan: [00:28:43] It's an interesting one. Yeah. We'll have to think some more about it. Maybe we'll have to get an ethical investor back on maybe Adamsville future [00:28:49][6.1]

Bryce Leske: [00:28:50] Super Bowl definitely sites. No, you're right. Anyway. [00:28:51][1.9]

Alec Renehan: [00:28:52] Yeah, well then maybe we challenge them and say, well, what would the world be without steel. [00:28:55][3.6]

Bryce Leske: [00:28:56] True. True, massive. Thank you to Daniel. As I said at the start of the show, who helped us with the research and analysis with that. It was a great piece of work. So thank you very much and also thank you to our sponsors, Super Hero, the new broker in town offering five dollar brokerage flat fee and also zero dollars on ETFs, zero dollar brokerage on ETF. So if you want to build your portfolio or if you want to add Fortescue to your satellite portfolio, head to superhero.com.au For more information and to sign up. We're almost there. We're getting through them. It's been fun. [00:29:30][33.6]

Alec Renehan: [00:29:30] We are enjoying this. [00:29:31][1.1]

Bryce Leske: [00:29:31] Chat next week. [00:29:31][0.0]

[1652.0]

More About

Meet your hosts

  • Alec Renehan

    Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Get the latest

Receive regular updates from our podcast teams, straight to your inbox.

The Equity Mates email keeps you informed and entertained with what's going on in business and markets
The perfect compliment to our Get Started Investing podcast series. Every week we’ll break down one key component of the world of finance to help you get started on your investing journey. This email is perfect for beginner investors or for those that want a refresher on some key investing terms and concepts.
The world of cryptocurrencies is a fascinating part of the investing universe these days. Questions abound about the future of the currencies themselves – Bitcoin, Ethereum etc. – and the use cases of the underlying blockchain technology. For those investing in crypto or interested in learning more about this corner of the market, we’re featuring some of the most interesting content we’ve come across in this weekly email.