Our updates, free in your inbox:

or click here to talk to us about securing a better financial future

FMG. Is the smart money right?

Smart money. It sure as hell can tilt the odds in an investor’s favour. Particularly when smart money is more than a hundred million dollars. But following it is not always an instant stockmarket success.

Forstecue Mining founder, chairman Andrew Forrest and the company’s CEO Nev Powers, spent this amount accumulating FMG shares in the past quarter.

FMG currently trades at 30% discount to valuation, not dissimilar to RIO.  The buying by the company’s executives is a compelling reason why investors should be adding FMG to their portfolio’s at these prices.

Andrew Forrest tried to buy 60 million FMG shares – all or none. But the market couldn’t satisfy demand. The stock’s recent volatility has been head spinning and it seems the selling came from fresh shorters. Like the grand old Duke of York, they marched the share price up and down!

Jim Chanos, US hedge fundie, went short FMG big time at just under $6. Chanos thought FMG’s best asset was self-promotion.  He was right in picking market momentum, and the herd followed.  But holding shorts in FMG requires nerves of steel!

Nev Powers is visiting brokers this week.  And the FMG fundamentals do look good, creating a great FMG buying opportunity.

The stock has been all about the production upgrade to 155 million tonnes. The message coming through is that it has pretty much been on time and on budget.  FMG has a good history of doing this.  But the market hasn’t believed the guidance.

In addition, the company is saying it has not seen… “Any change whatsoever in buying behaviour from our customers.”  i.e. China. The iron ore spot price has bottomed around $130 a tonne, well above the marginal Chinese production cost of $120 a tonne. Powers commented FMG had the upmost confidence that Chinese steel demand was more about “releasing the brakes’’ rather than providing stimulus. And concerns about an apparent disconnect between steel production and end-user demand, were overstated.

This fits in with RIO’s Iron Ore Head of Division, Sam Walshe’s recent view, that Chinese steel production is set to increase to a billion tonnes a year, up from around 700 million tonnes currently.

Industry sources are saying that Pilbara producers have been able to sell every iron ore tonne they can produce.  Production lost due to the May cyclones appears to have been made up. And yesterday’s May figures released by the Port Headland Port Authority show May’s export figures were at all-time highs. Exports to China were also at record levels.

So what will FMG do when it hits its bootstraps producing 155 mtpa?  Debt will be paid down and shareholders will be rewarded with enormous dividends from its substantial cash flow. Andrew Forrest and Nev Powers obviously think this may occur sooner.   The word is big ticket capex will be on hold for a bit.

FMG gearing peaks at 55% during the construction phase. The aim is to reduce this to 30-40% and achieve an investment grade balance sheet, which will make longer term borrowings cheaper.

Over the next couple of years FMG earnings are forecast to more than double from current 33 to 80 cents a share, with potentially as much as 65 cents of that increase being paid out. A prospective div yield of 12% in 2014 – move over Telstra!

When majors BHP and RIO report their June production figures, expect to see major consensus upgrades. Similar to FMG, the shorters and the market will be caught with their pants down.  Never a pretty sight.

Leave a Reply

Your email address will not be published. Required fields are marked *