Monsters of Rock: Where do Fortescue dividends go from 2024?

Fortescue surprises to the upside on its payout ratio as analysts mull the long-term outlook for Andrew Forrest’s iron ore miner
Lynas pledges supply discipline as rare earths market shows green shoots
ERA sinks on controversial entitlement offer backed by Rio

Andrew Forrest’s Fortescue (ASX:FMG) continued to make bank from its iron ore projects even as it cut 700 jobs and dumped long-running green hydrogen production ambitions after FY24, with dividends up 13% to $1.97/sh in its end-of-year results.

The final 89c a share payout takes returns to $6.1bn for the year, around $2.2bn into the pockets of exec chair Twiggy and family, including a tad over $1bn for the final payout.

NPAT missed consensus estimates by around 7%, with a final figure of US$5.7bn, down on analyst expectations of US$6.11bn. Depreciation and amortisation charges, especially linked to the completion of the ~US$4bn Iron Bridge mine, hit FMG despite a 7% lift in underlying EBITDA to US$10.7bn, which was roughly in line with consensus.

But the dividend ratio was the big shock to the upside, with payouts representing 70% of NPAT, within its 50-80% target range but above last year’s 65% ratio and the consensus estimates of 66%.

Jarden, which is bearish on iron ore prices with a long-term forecast of US$69/t for FMG’s 58% Fe product by 2028, saw dividend preservation as an interesting takeaway of the FY results release.

Analyst Jon Bishop also noted the company remains set on investing in its US$6.2bn decarbonisation platform at its iron ore sites by 2030, and sees the dividend stream hitting turbulence as capex increases and prices fall.

“Whilst the chairman has publicly walked back the 15Mt of green hydrogen target for 2030, the decarbonisation efforts remain focused for
real zero by 2030,” Bishop said.

“Dividend preservation might also be a takeaway and focus of the management call, however, HME replacement, decarbonisation and an increasing need to step up resource and reserve replacement drilling with consensus outlook for a falling Fe price should put the dividend stream under some pressure.”

FMG saw prices for its hematite, ironically shielded by poor profitability at China’s steel mills due to its lower grade, up 9% in FY24 to US$103.01/dmt, though C1 costs rose 4% to US$18.24/t and are expected to lift further to US$18.50-19.75/t in FY25.

After a fortnight under US$100/t, the 62% Fe benchmark rose slightly in morning trade in Singapore to US$102.30/t.

Lynas commentary

Lynas (ASX:LYC) managing director Amanda Lacaze has pledged to maintain supply discipline despite green shoots in the rare earths market, as prices recover from multi-year lows.

Lynas saw NPAT fall from $310.7m in FY23 to $84.5m in FY24, with revenue down 37% to $463.3m and EBITDA cut almost three times over from $377.7m to $132.1m.

The flagship light rare earths product NdPr oxide, the bellwether for the magnet metals market, has fallen from highs of US$175/kg in early 2022 to under US$50/kg earlier this year. Lynas views prices as ‘stubbornly low’.

It’s on a decent run this month, lifting to over US$56/kg on the Shanghai Metals Market before China’s value added tax is taken out.

That’s not enough for Lynas to sprint to hit the 10,500tpa capacity of its expanded Mt Weld mine and processing chain, which includes a new cracking and leaching plant in Kalgoorlie, WA, and refinery in Malaysia.

But there is hope from the company’s top brass the market is turning a corner, with the Chinese Government largely withholding increasing quotas – a key factor behind 2023’s price dive.

“I think the market is adjusting to slightly more moderate production levels, and the Chinese quotas assist us with that. But certainly through this year, by the end of the year, our objective would be to be able to demonstrate our abilities to sustainably produce at the number that we have targeted now for quite some time,” Lacaze told analysts on an earnings call today.

“That effectively means that we need to have both Kalgoorlie and Malaysian cracking and leaching performing reliably at target rates, and we will optimise the proportion of production between those two.

“That’s not going to be what we do, particularly in the first six months of the year. We think that it’s quite important not to provide any more supply-side pressure into the market as it readjusts and as the price starts to improve.

“It’s very pleasing the way that it’s improved over the past month or so. I said to (COO) Pol (Le Roux) that we could have some Australian sparkling, but not champagne, not yet.”

Whether bolstering the supply chain outside China will make prices more robust remains to be seen.

Lacaze says there is demand from magnet buyers in Europe to identify ex-China supply chains that fit with ethical and friendly sourcing regulations.

Lacaze says the West has the ‘resource you need’ in its Mt Weld mine and MP Materials’ Mountain Pass operation in the USA, a project Lynas tried to acquire in abandoned merger talks earlier this year, but said downstream was the key for Europe to compete in the magnet supply chain with China.

“I think we see both the US government and the EU governments really adopting… I call it the carrot-and-stick-get-the-donkey-moving strategy.

“They both have carrots with things like the Inflation Reduction Act in the US, but they also have sticks like the CRMA in the EU or some other sourcing legislation that they have in the US,” she said.

“We will all be better if there is more development of the outside China industry and that’s not just about resource, because, frankly you put Mt Weld and say Mountain Pass together, you’ve got pretty much the resource that you need – it’s really about downstream industry development as well.”

Lynas is expanding by developing an additional plant in the USA, funded by the Department of Defense, but it has delayed work on the plant into 2025 due to a wastewater permitting issue that is unlikely to resolve in 2024.

Rio turns screw at ERA

Rio Tinto (ASX:RIO) has put its hand to the fire, stoking the fury of minorities in its 86%-owner uranium stock Energy Resources of Australia (ASX:ERA) by backing a dilutive equity raise that could net as much as $880 million.

At 2c per share the cash is proposed to be raised at a charitable 87.8% discount to ERA’s five day VWAP, with ERA seeking a minimum $210m and Rio pledging to take up its full pro-rata entitlement.

At $880m, the money sink of a company thinks it will be funded up to Q3 2027 to continue known clean-up activities at the Ranger uranium mine, a mothballed deposit ERA, Rio and Canberra have all pledged to rehab and return to the state of the surrounding Kakadu National Park.

This is, by the by, the very entitlement offer minority holder Zentree Investments Limited had tried to pre-empt by laying a Takeovers Panel application against, claiming Rio Tinto was engineering a takeover by stealth of minority interests. It was knocked back since the offer wasn’t a live proposition at the time.

ERA will run out of money either late in 2024 or early next year if it cannot get the entitlement offer across the line.

The Commonwealth Government refused a request for a $210m drawdown of the trust fund set aside for the mine’s clean-up, with ERA’s independent board also being knocked back by Rio in its bid to procure a credit facility to cover the shortfall and deciding not to delay expenditure with costs of the $2.4bn rehab work continuing to climb with each delay.

Those parties want ERA to try work with the Mirarr People in the NT to develop the Jabiluka uranium deposit or sell it to a company that will. ERA won an injunction against a move from the Albanese Government and the former Labor NT Government to not renew its lease at the site, where it has long given the Mirarr veto rights over development.

That all came before the change in government that brought the Country Liberal Party’s Lina Finoccchiaro to power as Chief Minister of the NT this month.

ERA shares sunk ~53% today. Expect some fireworks.

The broader materials sector fell 0.97%, led by falls for the big iron ore miners, with energy 1.41% off.

African gold miner Perseus Mining (ASX:PRU) was the big mover in the mining space, up almost 6% after lifting revenue 7% to US$1.026bn, EBITDA 13% to US$625.2m and profit after tax 14% to US$364.8m.

PRU declared a 3.75c per share final dividend (5c total) with a $100m 12 month buyback also announced to return some of its $587 million cash pile to shareholders, even after the acquisitions of OreCorp and a ~14% stake in Guinean gold explorer Predictive Discovery (ASX:PDI).