Fortescue Metals Group (FMG)

Miners lead share market slide

http://www.abc.net.au/news/2015-03-11/mi...de/6301312

The world's biggest miner, BHP Billiton, was leading the declines, despite a stabilisation in iron ore prices overnight, albeit just above six-year lows at $US58.50 a tonne in the Chinese port of Tianjin.

The big Australian's market capitalisation was 5.2 per cent smaller in early trade, losing $1.67 a share to $30.24.

Around half of this was due to the company trading without rights to its latest 62 US cent (81 cent) dividend from today onwards.

Its main rival, Rio Tinto, was a much more modest 1.4 per cent lower at $57.77.

Australia's third biggest iron ore producer Fortescue was off 3.7 per cent to $1.95, its lowest share price since the absolute peak of the global financial crisis in early 2009.

Fortescue's share price has declined from A$2.68 to A$1.92 within a month, a down of nearly 30%! In view of the weak outlook of IR and A$, any buddies dare to catch the falling knife?

Fortescue ‘high risk’ as iron ore price hits new lows

http://www.theaustralian.com.au/business...7259565626

Australia’s iron ore miners have been under consistent pressure as the price of the steelmaking commodity continues to fall to historic lows.

At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US57.70 a tonne, down 1.4 per cent from its previous close of $US58.50 a tonne. It is the first time the commodity has traded below $US58 a tonne since the first half of 2009.

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Look's like IR is heading back to US$30 10-years ago; and FMG will probably discontinue its dividend policy when that happen. IMO landing will not come so quickly.

Though outlook very bad, but FMG has some daring supporters:

- FMG chairman Andrew Forrest bought 4 million of shares on November 2014 spending $11 million
- US-based fund management The Capital Group took up a substantial holding of 5.02 per cent in FMG in Feb 2015
- Early this month, The Capital Group increased its stake to 6.05% buying 32 million shares at an average price of $2.447 each

I think the bet is not only on IR recovery, but also speculating that FMG may be a takeover target of its competitors.

Fortescue Could Get Squeezed In The Iron Ore Market By Rio Tinto And BHP

http://seekingalpha.com/article/2998346-...to-and-bhp

The global seaborne trade in iron ore has long been dominated by Vale (NYSE:VALE), BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO). However, when the iron ore market was booming, new players tried to enter the market and compete with the established ones.

Most prominent of the new players is Fortescue Metals (OTCQX:FSUGY), which started mining in 2008 and is now the fourth largest miner of iron ore. With the exception of Vale who is in Brazil, all of these companies get their iron ore from Australia.

The boom was primarily a result of a huge increase in demand for iron ore from China. The country now accounts for almost half of the worldwide production of steel and is therefore the most important customer of iron ore. However, production in China has now stabilized, which means that demand for iron ore is not as strong as it has been in the past.

Since the big three of Rio, BHP and Vale have been in business for a much longer time, it should come as no surprise that Fortescue has significantly higher costs than the former. The table below shows how the three Australian companies compare with regards to iron ore.

[ Rio / BHP / Fortescue ]
Market share % (2014) [ 20 / 17 / 11 ]
EBITDA margin % (2014) [ 66 / 61 / 41 ]
Target production (2015) [ 330 Mt / 245 Mt / 155 Mt ]
Unit cash costs (2014) [ $21+ / $24+ / $29+ ]
Source: company presentations of Rio, BHP and Fortescue

Looking at the statistics reveals that Fortescue is an outlier when it comes to mining iron ore. While Fortescue has done much over the years to bring down its costs, it's still more expensive for Fortescue to mine iron ore in comparison to the other two. Rio seems to be the lowest cost producer of iron ore and has the highest margins. BHP is not that far behind.

Fortescue Scraps $2.5 Billion Bond Sale

http://www.wsj.com/articles/fortescue-sc...1426638777

SYDNEY—Fortescue Metals Group Ltd. scrapped a planned $2.5 billion bond sale Wednesday, a surprise move that highlights investor jitters toward iron-ore exporters because of slack demand for the commodity from China and rising supply.

Fortescue—the world’s fourth-largest iron-ore exporter by volume—had hoped to lower its interest charges as part of a broader campaign to protect profits from falling iron-ore prices. The company earlier this month outlined plans for a multibillion-dollar debt refinancing, that included the debt issue as well as a plan to extend the maturity on an existing $4.9 billion credit facility.

Fortescue has been grappling with a halving in iron-ore prices over the past year, as supplies from new and expanded mines outpace demand for the raw material. The company’s net profit tumbled more than 80% in the six months through December despite a sharp rise in shipments.

“The objective of the refinancing was to extend Fortescue’s maturity profile and minimize interest costs,” Chief Executive Nev Power said. “Debt capital markets were not favorable at this time and as a result we think it is a disciplined and prudent decision to defer the voluntary refinancing at this stage.”

Iron-ore prices have been hit by a glut in supply coming from Australian companies including Fortescue and its larger peers Rio Tinto PLC and BHP Billiton Ltd. That has coincided with moderating demand growth in China, the world’s biggest consumer of the commodity.

Many banks are forecasting iron-ore prices to fall further this year as global supplies continue to rise.

Analysts said Fortescue’s decision to abandon the debt restructuring illustrates weak sentiment toward iron ore. Still, they believe Fortescue can meet future repayments and maintain its current dividend, as long as iron-ore prices don’t fall further.

“They have miscued in terms of seeking to refinance now, but it would be much worse if the debt and bond markets were totally closed to them,” said Mike Harrowell, Sydney-based resources analyst at broker BBY.

Fortescue accelerated debt repayments in recent years as it earned healthy margins on iron-ore prices above $100 a metric ton. Iron ore now trades at $58 a ton, closer to Fortescue’s operating expenses.

It costs Fortescue in the mid-$40-a-ton range to produce and deliver its ore, which it sells at a discount to benchmark spot prices due to lower iron content than its larger rivals.

Mr. Power has previously said paying down a hefty debt pile, that was used to fund past rapid expansion and at its peak topped $12 billion, is Fortescue’s top priority. The mining company, founded by billionaire Andrew Forrest, used large loans to build up a network of land assets, power-and-water infrastructure, and rail-and-port facilities in the resource-rich Pilbara region of Western Australia state.

Fortescue said the next deadline for repayments on current loans is in April 2017.

Iron ore is expected to stay low due to

1. Poor Chinese demand this coming
2. Greater expectation on pollution control

Furthermore, iron ore has weaken below $57 this week.

No near term catalyst for iron ore price increase this coming spring.

More supply is expected to come online from the 4 majors as well

Global commodities prices have been falling due to (i) Europe deflation risk, (ii) anticipation of Fed's rate change, (iii) continuous China slowdown and tighten regulatory control, (iv) funds exit strategy from commodities investments. Short to mid term wise, outlook is not good. Prices are driving lower because the investors including funds are pricing in the impact of (i), (ii) and (iii). Rightfully when (i), (ii) and (iii) did materialize, market expectations met and prices shouldn't have much changes.

However the potential catalysts I can think of are:

(i) M&A among the big 4,
(ii) Output cut,
(iii) Closure of more smaller mines,
(iv) Re-implementing of annual prices fixing practice,
(v) Aussie to impose rules in stabilising iron ore price,
(vi) Aussie restrictions to mining activities by Rio Tinto and BHP Billiton (which are half British)

Aside from the potential catalysts, we should note that FMG started mining in year 2009 and is the 4th largest producer in the world since 2013. It's production costs have been reduced significantly over the years (by increasing its production efficiency). Though FMG is still the higher cost miner among the 4, but I am not surprise that it will remain profitable despite lower iron ore price, however, of course with greater production surplus.

Lastly, if Australia government were to protect its natural resources interest, FMG being the pure Aussie miner should be one of the beneficiary.

(19-03-2015, 11:37 AM)valuebuddies Wrote: Global commodities prices have been falling due to (i) Europe deflation risk, (ii) anticipation of Fed's rate change, (iii) continuous China slowdown and tighten regulatory control, (iv) funds exit strategy from commodities investments. Short to mid term wise, outlook is not good. Prices are driving lower because the investors including funds are pricing in the impact of (i), (ii) and (iii). Rightfully when (i), (ii) and (iii) did materialize, market expectations met and prices shouldn't have much changes.

However the potential catalysts I can think of are:

(i) M&A among the big 4,
(ii) Output cut,
(iii) Closure of more smaller mines,
(iv) Re-implementing of annual prices fixing practice,
(v) Aussie to impose rules in stabilising iron ore price,
(vi) Aussie restrictions to mining activities by Rio Tinto and BHP Billiton (which are half British)

Aside from the potential catalysts, we should note that FMG started mining in year 2009 and is the 4th largest producer in the world since 2013. It's production costs have been reduced significantly over the years (by increasing its production efficiency). Though FMG is still the higher cost miner among the 4, but I am not surprise that it will remain profitable despite lower iron ore price, however, of course with greater production surplus.

Lastly, if Australia government were to protect its natural resources interest, FMG being the pure Aussie miner should be one of the beneficiary.

Tough for M&A and and output cut. It would be in their interest to protect their market shares, and squeeze out the smaller miners. Lots of smaller (and chinese) miners have shut down, but the speed of shutting down is slowing down. My understanding is that some contracts are still on annual settlement, while a large portion is on spot/ index settlement.

Furthermore, Aussie have reviewed the royalties payable by the miners. Aussie miner do have a natural freight advantage due to their nearer location to the world biggest iron ore customer China. The miners are restructuring their operations in view of the lower IR price, and IR forms bulk of the profitability

With Chinese steel price going up, iron ore are moving downwards this 2 weeks.

It is actually good news to the big 4 when those high cost miners (eg. those from China and small players) close down. Eventually output cut, and monopoly to the big 4. To me, there are still a lot of possibility for FMG, be it overtake the top 3 in term of production cost or output, or be a takeover target. Most importantly, I always have Mr. Buffet's quote in mind: 'Be Fearful When Others Are Greedy and Greedy When Others Are Fearful'.