When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
In an era of fake news, it’s getting more difficult to separate fact from fiction. Yet it’s imperative we do so because the consequences for being deceived can be enormous.
The bull and bear case for Fortescue
The Fortescue Metals Group Limited (ASX: FMG) share price could rise or fall from here.
I don’t just mean that share prices can do anything, of course they can. I’m saying there are sizeable positives and negatives for the business.
Over the last 12 months, the Fortescue share price has been above $26 and below $14.
But where to now?
Bullish case for the Fortescue share price
Fortescue has been very impressive in its relatively short life.
Its profit is currently heavily influenced by the iron ore price, as well as the size of the discount applied to its lower grade iron ore.
The iron price has recovered nicely from the low of under US$90 we saw near the end of 2021. That’s a big reason the Fortescue share price has been going up over the last few months.
If the iron ore price stays above US$100 per tonne then I think it can continue making good profit and paying good dividends. Those dividends alone could help Fortescue match the returns of the ASX over the next few years. Including the franking credits, the FY22 dividend yield is 13.4% according to CommSec.
But Fortescue is looking to increase the grade of its iron. It’s working on high-quality iron projects like the Iron Bridge Magnetite Project. This could help increase the market opinion on the quality of the business’ profit or product.
For me, the biggest attraction about Fortescue’s future is the Fortescue Future Industries (FFI) segment. This is where FFI wants to become a global green hydrogen powerhouse and also have exposure to other ‘green’ things like renewable energy, electrolysers, green ammonia, batteries and so on.
The world is going to be spending trillions of dollars on decarbonising and staying decarbonised.
Whilst not important to the valuation (for now), I think if Fortescue can find any good projects with different commodities like copper which it’s exploring for, that could help diversify and de-risk the business.
Bearish thoughts
Nearly all of Fortescue’s current operations profit is made from selling iron to China.
If the iron ore price drops then the Fortescue share price suffers. That’s a key risk with resources businesses.
If China stops buying iron from Australia, or buys more from Brazil, or gets iron from Africa, or gets more iron from other sources (such as domestically), that would be bad news for Fortescue.
There is a lot of investor attention on FFI. There’s the argument that Fortescue should stick to mining and not keep 10% of profit for that activity, which could instead be used for paying bigger dividends.
All of Fortescue’s green efforts could be thwarted if better technology from a rival comes along or a country like Saudi Arabia is able to produce green hydrogen at a much cheaper cost than Fortescue can. Time will tell with this one.
There’s also the chance that consumers and businesses are happy to use any sort of hydrogen (‘blue’ hydrogen), made using fossil fuel energy, with no preference for green hydrogen.
Final thoughts on the Fortescue share price
The Fortescue share price is close to what I’d be willing to start a new small position with.
However, as a shareholder already, and my cost base is lower than today’s price, I’m looking for a cheaper price to personally buy more. That will probably be if/when the iron ore price drops back to US$100 or lower.
If you’re anything like me, you might be thinking now is a good time to have cash ‘sitting on the sidelines’.
Information warning: The information in this article was published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169
