Fortress Minerals Limited: Financial Analysis for Investment Decision – Net Profit Decline of 19.3%

Business Description

Fortress Minerals Limited (“Fortress”) is a Singapore-incorporated mining company focused primarily on the exploration, mining, production, and sale of iron ore. The company’s core operations revolve around its Bukit Besi mine in Malaysia, while its expansion efforts include developing an integrated processing plant at the CASB mine and conducting prospecting activities in Sabah. Fortress also provides mining contracting services and aims to prudently grow its commodities portfolio via acquisitions and joint ventures.

Geographically, Fortress operates predominantly in Malaysia, with revenue contributions from both domestic customers and the export market, including China. The company’s competitive advantage lies in its production of high-grade magnetite iron ore with low impurity levels, which is efficiently priced against global benchmarks.

Industry Position

Fortress competes in the global iron ore mining sector, where demand is influenced by steel production. The company faces challenges from China’s economic slowdown and property sector struggles, while benefiting from growth in other markets like India and Malaysia. Fortress highlights its competitive edge through strong customer relationships and scalable production capabilities. However, its exact market share is not disclosed in the report.

Revenue Streams and Customer Base

Fortress generates revenue from the sale of iron ore, with 94.7% of its revenue in the nine months ending November 30, 2024, derived from Malaysia, and the remainder from exports to China. It has recently signed two new offtake agreements with a domestic steel mill, covering approximately 510,000 WMT of iron ore for delivery through FY2026.

The company’s supply chain includes mining operations, in-house transportation services, and processing enhancements at its mines. Competitive advantages include integrated processing capabilities and a focus on high-grade ore production.

Financial Statement Analysis

Income Statement

• Revenue: For 3Q FY2025, revenue increased by 19.6% year-on-year (YoY) to US\$13.0 million due to higher sales volume and a marginally higher average selling price. However, for the nine months, revenue declined by 7.6% YoY to US\$38.3 million.
• Net Profit: Net profit for 3Q FY2025 decreased by 68.1% YoY to US\$0.7 million. For the nine months, net profit declined by 19.3% YoY to US\$7.6 million. Higher cost of sales and increased operating expenses were the main factors for the decline.
• Cost of Sales: Cost of sales increased significantly by 54.7% YoY to US\$5.7 million in 3Q FY2025 due to higher production levels and inventory costs, leading to a reduced gross profit margin of 55.8%.

Balance Sheet

• Assets: Total assets increased to US\$107.1 million as of November 30, 2024, from US\$97.2 million as of February 29, 2024. Non-current assets grew due to investments in plant and equipment and mining properties.
• Liabilities: Total liabilities increased marginally to US\$26.0 million. Current liabilities decreased due to repayment of borrowings, while non-current liabilities grew due to higher deferred tax liabilities and hire purchase borrowings.
• Equity: Shareholders’ equity grew to US\$80.7 million from US\$72.2 million, driven by retained earnings.

Cash Flow Statement

• Operating Activities: Net cash generated from operating activities stood at US\$9.7 million for the nine months, down from US\$13.2 million YoY due to higher working capital outflows, particularly for inventory buildup.
• Investing Activities: Net cash used in investing activities decreased to US\$1.6 million, reflecting lower capital expenditures compared to 3Q FY2024.
• Financing Activities: Net cash used in financing activities increased to US\$9.6 million due to the absence of proceeds from share issuance, higher repayments of borrowings, and lease liabilities.

Dividend Information

No dividend was declared for the current reporting period. The prior year’s final dividend payment amounted to US\$2.4 million.

Key Strengths

• Increased revenue for 3Q FY2025 (+19.6% YoY).
• Strong customer relationships, as evidenced by new offtake agreements.
• Scalable production capabilities supported by investments in new plants and equipment.
• Positive working capital position of US\$12.7 million.

Key Risks

• Declining net profit margins due to rising costs and operating expenses.
• Dependence on the volatile iron ore market and economic conditions in China.
• Uncertainty surrounding the renewal of prospecting licenses in Sabah.
• Higher production costs impacting profitability.

Special Actions to Improve Profitability

• Development of new plants at Bukit Besi and CASB to enhance production capabilities.
• Introduction of a pilot plant for trial production at CASB for high-grade iron ore and copper concentrates.
• Cost-saving measures, including increased use of in-house transportation services.

Report Date and Financial Year

The report is dated January 9, 2025, and covers the financial performance for the period ending November 30, 2024 (3Q FY2025).

Investment Recommendations

If You Are Holding the Stock:

Maintain a cautious hold. The company is investing in future growth through substantial capital expenditures, which could yield long-term benefits. However, monitor operating costs and the outcome of the Sabah license renewals closely.

If You Are Not Holding the Stock:

Consider waiting for clearer signs of profitability improvement or successful execution of expansion projects. The declining net profit and industry challenges warrant cautious optimism.

Disclaimer

This analysis is for informational purposes only and does not constitute financial advice. Investors should perform their due diligence or consult a financial advisor before making investment decisions.

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