Terry McCrann: Fortescue’s profit rose 17pc, handing ‘Twiggy’ Forrest $5b
BHP and Rio are bigger and older, but only Andrew Forrest’s Fortescue, with its lower-grade ore, has turned this time of recession into a handsome profit, writes Terry McCrann.
Terry McCrann
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All three of our big Pilbara iron ore producers scored large price increases that were sustained right through the 2019-20 fiscal year even into the politician-mandated global recession — thank you China, with a supporting role played by Brazil.
But only one of the three, Andrew “Twiggy” Forrest’s Fortescue, turned that fortune cookie from the Middle Kingdom into a higher profit.
And it wasn’t just a modestly higher profit but one that shot up 17 per cent and enabled the company to increase its dividend by an even more impressive 54 per cent — with a very big chunk of the $5 billion that was paid out going to Twiggy.
Fortescue’s performance is even more remarkable, given that it’s been the weakest of the big three, coming a – very – late third to the industry to the long-established duo of BHP and Rio Tinto, and which both have premium ore qualitatively better (and so attracting a higher price) than Fortescue’s.
As I’ve explained before, that actually works for Fortescue in a bull market like we’ve seen over the past year, as the premium margin shrinks.
But it was only a few years ago — when Chinese demand sagged and Brazil’s Vale was still going gangbusters — that Fortescue was very painfully the “swing or marginal” producer; and Twiggy was pleading for Pilbara production limits to keep some demand for his ore.
Now all that’s long forgotten as Fortescue and Twiggy bask in the warm Confucian sun. But how come Fortescue went up when BHP and Rio went down?
The main reason is that Fortescue is only iron ore. The higher prices on higher volumes all flowed through to bottom line profit.
Both BHP and Rio had “other things” to offset the good news out of their iron ore divisions.
Rio, which is closest to Fortescue in being “long iron ore” saw a slightly higher underlying operating iron ore profit of $US7.7 billion ($10.7 billion) — for the six months to June as Rio is a calendar year company — offset by a lower combined profit of $US2.3 billion from its copper, aluminium and energy divisions.
So Rio’s group operating profit was down 6 per cent to $US9.64 billion. The iron ore contribution went up to 80 per cent.
BHP has more of the “other things” — coal, petroleum and copper. All suffered falls in their operating profits; in the case of petroleum and coal, huge falls.
So while BHP’s iron ore profit was up an impressive 31 per cent — better even than Fortescue — the combined profit of the “other things” plunged a numbing 47 per cent; and group profit was therefore down 5 per cent.
The iron ore contribution to the group operating result was up from 48 to 66 per cent.
Underscoring these shifts was also the way Fortescue’s less-than-premium ore actually worked for it in the unusual circumstances of the 2019-20 year.
Circumstances that were made even more “unusual” once we moved into the sort of recession in the last quarter that would normally send all commodity prices plunging; and certainly did for oil (and to a lesser extent, gas) and coal.
BHP scored a 16 per cent rise in the iron ore price averaged over the year or just under $US9 a tonne.
Fortescue scored a 21 per cent price rise averaged over the year and, in its case, that was a little under $US14 a tonne. That made a huge difference to its margin and then into its bottom line — and out to Twiggy’s bank balance.
It’s important to add that in all three cases, the lush profits were ultimately only possible by the most dramatic reductions in the costs of production we have ever seen in Australia.
Those cost cuts started with reform of industrial relations in the 1980s and 1990s, moving subsequently into 21st century high-tech mining. All that also worked for Twiggy coming in after the hard yards had been covered by Rio and BHP.
The two big questions in the wake of these numbers — and where their profits might be headed through 2020-21 and beyond — are what happens to the specific China (plus Brazil) story; and what happens to the global economy and so commodity prices more generally?
The “bad news” combination — for all three, but in worse particular Twiggy — would be easing demand out of China and Vale getting its act together.
The good news is that it is a combination which does not look likely in the short to medium term.
The broader question is the global economy. It has certainly bounced off the June quarter catastrophe. That must put a floor under commodity prices — good news for Rio and especially BHP.
BIG TECH’S WALL ST BOOM
Wall Street is at a record and heading higher. Our market is not and at best might be dragged reluctantly higher in the wake of Wall Street and buoyant Asian markets.
The key difference is all about tech, with Apple alone now worth 50 per cent more than the entire Australian market. Two other stocks, Microsoft and Amazon, are also each worth more than the entire Australian market.
Take out tech and the performance of Wall Street hasn’t been dramatically that much better than Australia’s since we all hit bottom back in March-April.
Australian investors have been giving a safety exit — the value of the Aussie dollar at US72c allows somewhat cheaper investing into the global space than would have been the case if the Aussie had stayed wallowing in the low-60s.
Originally published as Terry McCrann: Fortescue’s profit rose 17pc, handing ‘Twiggy’ Forrest $5b