Miner Beating Tech Stocks With 2019 Surge Sees More Gains Ahead

(Bloomberg) -- China’s old-school appetite for iron ore has catapulted Fortescue Metals Group Ltd. ahead of some of the hottest tech sector giants and a fast-food behemoth as one of this year’s best performing global stocks.

Shares of Australia’s Fortescue have more than doubled in 2019, rebounding from two straight annual declines to outpace a 20% advance in the price of benchmark iron ore. It’s a rally that can continue in 2020, according to the exporter’s top executive.

“There’s no doubt that strong investment in infrastructure and that continued path to urbanization is still occurring in China,” Chief Executive Officer Elizabeth Gaines said in a phone interview. “We can continue to generate very strong margins.”

Fortescue is the the second-best performing stock on the S&P Global 1200 Index, outpacing internet giant Meituan Dianping and Chipotle Mexican Grill Inc. -- and is behind only Canada’s e-commerce platform Shopify Inc. It’s also the top performer this year among Australia’s 50 largest companies.

Continued strong demand in China, the top buyer, and work to add new mines that’ll deliver higher-quality products, means the company is positioned to extend its advance, Gaines said.

Fortescue, which currently ships cheaper iron ore than key competitors, has been well placed to benefit from this year’s roller-coaster prices. The producer captured gains as iron ore jumped to a five-year high in July after a January dam disaster in Brazil triggered a supply squeeze. It also prospered as steel mills in China responded to rising input costs by seeking out less expensive raw materials.

Investments in new mine projects in Australia worth almost $4 billion will see the producer add more premium iron ore, meaning Fortescue will be prepared for an eventual shift back to quality raw materials once profitability improves in China’s steel sector, according to Scott Schier, an analyst at Clarksons Platou Securities Inc.

“With mill margins under pressure, mills have focused on raw material input costs and Fortescue has been the biggest beneficiary of this trend,” he said. The new mines mean the company is also “positioning itself for a more diversified and higher-grade product mix at a time when we believe the spread will begin to widen again,” Schier said.

Read more: Iron Ore Spreads Crushed as Flight to Quality Takes a Knock

Fortescue’s new Eliwana mine is on track to begin exports from December 2020, and the Iron Bridge venture with China Baowu Steel Group Corp. and Taiwan’s Formosa Plastics Corp. is expected to begin production from the first half of 2022, the company said Thursday.

Analysts are more cautious and currently have more sell recommendations than buy calls on Fortescue, according to data compiled by Bloomberg. The miner’s advance isn’t likely to continue as prices decline on rising supply, according to Morgans Financial Ltd. analyst Adrian Prendergast. “This isn’t something we view as sustainable,” he said.

Even with lower steel production in China next year, Fortescue will benefit as it adds more premium products, lifts export volumes and makes further cuts to production costs, Gaines said in the Thursday interview.

“These are sustainable improvements,” Gaines said. “Whether that’s on cost performance, our shipments, or our product strategy: we are delivering every quarter.”

To contact the reporter on this story: David Stringer in Melbourne at dstringer3@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Keith Gosman, Jake Lloyd-Smith

©2019 Bloomberg L.P.