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Fortescue Metals Group (FMG) - Bumper FY17, But Winter Is Coming

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Fortescue Metals (FMG) reported a strong set of FY17 results with underlying EBITDA of US$4.7bn (vs Argonaut $4.8bn) and NPAT of US$2.1bn (vs Argonaut US$1.8bn, +15%). Full year FY17 production came in at 170.4Mt (vs 165-170Mt guidance) at a C1 cost of US$12.82/wmt (-17% yoy). A final dividend of 25cps was announced increasing total FY17 dividends to 45cps, representing a 52% payout ratio. Looking forward to FY18, FMG sees production of 170Mtpa at a C1 cost of US$11-12/wmt and an increase in the dividend payout ratio to 50-80% of net profits. We continue to believe prices will moderate in FY18 as Chinese de-capacity programs and high stockpile levels cap the upside. We also expect FMG’s capacity to maintain high level dividends will be short lived as the proposed US$1.5bn capex for the Firetail replacement options come into play in FY19. HOLD.

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