- Fortescue result meets consensus expectations
- Cost guidance increased, earnings forecasts trimmed
- Production guidance maintained, brokers factor in some slippage
- Buy ratings continue to dominate

By Chris Shaw

Full year underlying earnings for iron ore play Fortescue Metals ((FMG)) came in at US$1,634 million, a significant increase from the US$707 million earned for the same period last year. The result was broadly in line with consensus estimates, UBS noting this was no surprise given some revenue and costs numbers had previously been advised to the market.

One feature of the result for Goldman Sachs was an increase in costs, with Fortescue indicating operating costs are likely to remain around the US$50 per tonne level for the immediate future. Higher stripping ratios for Fortescue should mean ongoing higher structural unit costs than for the likes of BHP Billiton ((BHP)) and Rio Tinto ((RIO)), notes Goldman Sachs.

Factoring in higher unit costs has seen cuts to earnings estimates for Fortescue, UBS lowering its numbers in coming years by 5-8%. UBS's valuation has also been lowered by 5% to $8.18. Citi similarly trimmed its FY12 earnings estimate by 4% to account for the increase in cost guidance, noting costs are unlikely to come down much prior to the Solomon project coming on-line in 2013/14.

Even adjusting for higher costs, Citi sees solid upside risk to earnings from continued strength in iron ore prices, estimating potential upside of as much as 40% in FY13 and 80% in FY14 based on current spot prices.

Fortescue continues to guide to a production target of 155 million tonnes per annum in coming years, with management currently indicating this target should be achieved by 2013. The market is taking a more cautious view, JP Morgan factoring in a two-year delay relative to this target and Citi building in related capex assumptions of US$10 billion compared to management's forecast of US$8.4 billion.

Gaining a 5th berth at Port Headland remains a key to achieving production targets notes Citi, as its numbers suggest consistently achieving more than 140 million tonnes per year will be difficult with only four berths at the port.