Brokers' take: Phillip downgrades Fortress Minerals on missed forecasts

PHILLIP Securities has downgraded Fortress Minerals to "accumulate" from "buy" with a lower target price of S$0.51 after the iron ore miner's latest set of financial results missed its forecasts.

In a Friday (Oct 15) report, analyst Vivian Ye noted that H1 FY2022 revenue and profit after tax and minority interest (Patmi) came in at 39 per cent and 34 per cent of the brokerage's forecasts.

To recap, Fortress Minerals' Q2 FY2022 revenue and Patmi for the period ended August 2021 fell year on year by 23.1 per cent to US$10 million, and 42.1 per cent to US$3.3 million, respectively.

Ye attributes the earnings miss to production disruptions at the group's Bukit Besi Mine owing to Malaysia's Phase 1 nationwide Total Lockdown lasting about 5 weeks. Sales volume was also lower than expected due to disruptions, leading to increased average unit cost.

The group's net debt increased significantly to US$14.7 million from Q1 2022, she added, while bank borrowings surged to US$22.9 million from US$166,000 after the acquisition of Fortress Mengapur in April 2021.

However, Ye notes that Fortress Minerals saw an offset from the disruptions with higher iron ore prices, with a 48 per cent improvement in selling prices compared to the previous year.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Operating cash flow increased as well, from US$54,000 in Q2 FY2021 to US$6.3 million in Q2 FY2022, aided by lower working capital.

She nonetheless expects iron ore prices to remain weak at around US$140 per dry metric tonne (DMT) with continued steel production cuts in China.

As such, the analyst has cut her sales volume forecast for FY2022 by 8.6 per cent to 455,020 DMT. This has resulted in a reduced average selling price estimate of US$120 per DMT for FY2022, and a 22 per cent lower Patmi projection of US$23.9 million.

Ye also highlighted that with a new offtake agreement signed by the group's subsidiary Fortress Resources, 375,000 wet metric tonnes (WMT) of core iron ore is due for delivery to a new customer from Q3 FY2022 to Q4 FY2023.

"The total volume of iron ore concentrate delivered in FY2021 was 497,369 WMT," noted the analyst.

As at 10.28 am shares of Fortress Minerals were down S$0.015 or 3.23 per cent to S$0.45.

Read more:

• Fortress Minerals unit bags 15-month offtake deal with Malaysia steel mill
• Fortress Minerals Q1 net profit more than triples to US$7.2m on record revenue
• Fortress Minerals FY21 net profit up 2.8 times to US$18.2m
• Directors of Q & M, Lian Beng and Fortress Minerals raise stakes