PhillipCapital’s Vivian Ye has initiated coverage on iron ore producer Fortress Minerals (FML) with a “buy” rating and target price of 28 cents.
The company is an iron ore concentrate producer in Malaysia and the company explores, mines, produces and sells magnetite iron-ore concentrate, primarily to steel mills in Malaysia and China.
As FY2019 was FML’s maiden year of commercial production, profitability margins were partly crimped by initial ramp-up costs and gestation. Its mining concession is located in Bukit Besi, Terangganu, Malaysia, with 7.18 million tons of reserves and 13 years of concession life.
Ye noted that as FY2019 was FML’s maiden year of commercial production, profitability margins were partly crimped by initial ramp-up costs and gestation.
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However, the analyst expects growing demand from steel mills in Malaysia to spur higher sales volumes.
She said, “On the basis of projected GDP growth of 6.5%-7.5% and construction-sector growth of 13.9% in 2021, demand for steel and iron ores is expected to increase.”
Demand was driven by new offtake agreements with steel mills in Malaysia, and Ye expects FML to increase production by 54% from FY2020 to FY2022. Malaysia’s 9M2020 production of iron and steel bars and rods grew 5.5% y-o-y.
FML also expects “healthy volume growth” of 40% in FY2021 to meet construction demand with 1HFY2021 production volume surging 57% y-o-y to 231,007 wet metric tonnes (WMT).
Furthermore, Ye highlights that there is high profitability for FML due to low-cost structure and proximity to customers.
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The unit cost of US$28.80 ($38.49) per WMT against average selling prices of US$95.90 per dry metric tonnes yielded gross profit margins of 66.7% in FY2020, compared to the industry average of about 50%.
Another advantage FML has is the close proximity of its Bukit Besi mine – of about 100km – to domestic steel-mill customers.
The quality of its iron ores (TFe grade of 65%), consistent supply and short delivery time are expected to ensure captive buyers from steel mills in Malaysia. Iron ores from Australia require a delivery time of about 10-20 days vs. daily trucking services in Malaysia.
Finally, Ye notes that FML has “considerable exploration upside potential”, as only 5% of concession area is explored. As FML only completed its plant expansion in late FY2020. There is thus substantial potential for mining as larger tracts are explored. FML’s mining rights will only expire in early 2033.
As at 12.38pm, shares of FML were trading at 24 cents, with a FY2021 dividend yield of 2.4%.
