Fortescue Lifts Dividend Target After Jump in Profit -- Update

By Robb M. Stewart Features Dow Jones Newswires

MELBOURNE, Australia--Fortescue Metals Group Ltd. (FMG.AU) has flagged a more aggressive dividend payout even as the iron-ore producer continues to chip away at debt, taking advantage of strong prices for the steel-making commodity.

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The Australian company, the world's No. 4 exporter of iron ore, will pay out a sharply higher final dividend after its annual profit more than doubled and said Monday it has plans to pay out a bigger percentage of earnings to shareholders in the future.

It is the latest mining company to reward investors with higher returns, as commodities including iron ore have recovered on strong demand from resources-hungry China and after several years of companies working to rebuild balance sheets and reduce costs.

"It's a natural progression for us," Fortescue Chief Executive Nev Power said in a phone interview with The Wall Street Journal.

The company has focused in recent years on cutting a mountain of debt that had underpinned its rapid expansion to challenge bigger Australian rivals Rio Tinto PLC (RIO.AU) and BHP Billiton Ltd. (BHP.AU). As production costs continued to decline and cash flows increased over the last year with the strength in iron prices, Mr. Power said the company had an opportunity to lift returns.

Net profit jumped to US$2.09 billion in the 12 months through June from US$984 million the year before, while revenue rose 19% to US$8.45 billion from US$7.08 billion, the Perth, Australia-based company said.

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Fortescue plans a final dividend of 25 Australian cents (US$0.20) a share to take its full-year payout to 45 cents, a jump from the 15 cents paid last year.

It has also increased its guided payout ratio to between 50% and 80% of net profit, based on the prevailing iron-ore price and its financial performance, from up to 40% previously.

Net debt was cut in half, to US$2.63 billion from US$5.19 billion a year earlier, and Mr. Power said the company would continue to seek opportunities to repay loans and would seek to drive costs down further. But while Fortescue was likely to move toward a net cash position in the coming years, it has no plans to hold on to large amounts of cash, he said.

Earlier this month, Rio Tinto said it would return US$3 billion in cash to shareholders after a jump in its first-half profit, offering a higher interim dividend alongside a plans to buy back a further US$1 billion in shares this year. That came after Anglo American PLC (AAL.LN) said it would reinstate a dividend slashed two years ago when commodity prices slumped.

During a conference call earlier Monday, Mr. Power said the company was diversifying beyond China to sell its ore to buyers in emerging Asian countries and in Europe, although given China accounts for a large proportion of the world's steel production it was likely to remain a core market.

Fortescue is targeting steady iron-ore shipments in the current financial year of about 170 million metric tons, after exports inched higher in the 2017 fiscal year, while targeting a further reduction in production costs.

Fortescue borrowed heavily to build a vast network of mining pits, rail lines and port infrastructure in Australia's remote Pilbara region in a decadelong quest to break the dominance of its Australian rivals and Brazil's Vale SA (VALE). The company has pushed to repay debt since 2012, when a slide in iron-ore prices forced it into emergency talks with lenders.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

August 21, 2017 03:10 ET (07:10 GMT)