Fortescure metal group ltd
The research group has undertaken an analysis of Fortescue Metal Group Limited (‘FMG’). The analysis consists of two parts. Part 1 includes a macro economic analysis which reviews FMG’s economic environment and how this impacted on its performance during the years ended 30 June 2008 to 30 June 2012. During this period FMG’s performance was primarily driven by an overall increase in the price of iron ore, underpinned by higher levels of demand for this product from China.
It is considered that continued demand for iron ore by Chinese steel producers and continued growth in China’s gross domestic product (‘GDP’) is likely to support the forecast iron ore price of USD120 per metric tonne (‘mt’) and result in future increased revenues for FMG. The recent depreciation of the Australian dollar (‘AUD’) against the United States dollar (‘USD’) will increase the USD profits of FMG as measured in AUD. Part 1 also includes an industry analysis which applies the ‘Porter five forces’ model and concludes that competition is ‘moderate’ meaning there is an opportunity for FMG to earn above average profits.
Part 2 is a business strategy analysis which identifies the competitive strategy adopted by FMG. It is considered that FMG has adopted a strategy of ‘cost leadership’ which is consistent with the needs of its customers who purchase iron ore based on price. Part 2 also identifies the key success factors associated with this strategy and the associated risks. It is considered that the business strategies of FMG (expanding production and cost reduction initiatives) are consistent with its chosen competitive strategy and as FMG is successfully implanting these strategies it is maintaining its competitive advantage.
A concern regarding FMG’s high interest and financing costs is noted; however an analysis of the company’s cashflow and debt structure allays this concern. For the purpose of the analysis the research group has relied on the information presented in the financial report for the year ended 30 June 2012 (the 2013 report was only recently published on 22 August 2013). Information contained in FMG’s June 2013 quarterly update to the Australian Stock Exchange (ASX) was also used to ensure up-to-date information was considered. 1 Part 1. Macro economic factors and Industry Analysis 1. 1.
Economic environment – Macroeconomic factors that impact on FMG’s performance. 1. 1. 1 FMG business activities FMG commenced construction of its initial mine, port and rail assets in 2006 and began shipping iron ore in 2008. 1 FMG’s principal activities are ‘the mining of iron ore from its Cloudbreak and Christmas Creek mine sites, the operation of an integrated mine, rail and port supply chain and the expansion of iron ore operations’. 2 FMG’s segment information for the year ended 30 June 2012 details that 96. 9% of external revenues for the sale of iron ore were received from customers located in China.