The Fortescue Metals Group Limited (ASX: FMG) share price will be on watch today as news broke on Saturday that the company had increased its stake in Cadente Copper to 20%. This cements its right to preserve its stake through future capital raisings and moreover, to participate in debt issues. The company is exploring a copper-gold porphyry in Peru.
Argentina and Ecuador are also part of Fortescue’s exploration program.
The South American investment logic
I have worked for Andrew Forrest in the past. Like anybody else, I have worked out that when he sees something in the distance in mining, then he is probably correct.
He went against the odds at Murrin-Murrin with the laterite nickel-cobalt mine, which required a massive and highly technological processing operation. In the past 4 years, nickel has been the stand out performer in base metals. He also went against the odds in the Pilbara mining low-grade ore using surface excavation machines. This was unheard of.
Regardless of the current situation, copper is likely to see strong demand in the decade to come on the back of its increase in use for electric vehicles and batteries, as well as continued growth in China and India. As for gold, the precious metal is likely to see sustained high prices. The combination of uncertainty, large volumes of quantitative easing, and low interest rates work in unison to keep gold high.
The Fortescue track record
It is hard to recall a week when Fortescue wasn’t up to something new or visionary over the past decade. At the recent Macquarie Conference, it covered its future plans. The US$1.3 billion Eliwana project. The US$2.6 billion Iron Bridge project. A US$800 million investment in energy infrastructure, including 275 kilometres of transmission lines and 150 megawatts of solar-powered generation. As always, Fortescue supports local suppliers and local contractors.
Current position
Over the past decade, Fortescue has achieved some truly impressive compound annual growth rates (CAGR). These include 14.1% for sales, 16.8% for cash flow, 17.6% for earnings per share, and a share price CAGR of 10.8%.
At the time of writing, Fortescue is trading at a very low price-to-earnings ratio of 5.49. This is a level well below its 10-year average of 10. At this low price, you also get a company that has a dividend CAGR of 36.3% and a 12-month trailing dividend yield of 7.36%.
Regardless of any sabre rattling that goes on between the great powers, only Australia can fulfil the iron ore quantities and qualities required by China. Over the medium term, when the current tensions have subsided, I believe Fortescue will still be one of the engines of the Australian economy.
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- ASX 200 drops 0.4%, Chinese threat to Australian iron
Motley Fool contributor Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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