FGE - Forge Group

[McCoy Pauley]

I will also say that high margins in any industry invite more competition... so, in essence it could be a double whammy. These things can take a while to be felt, of course, so be careful when making assumptions in any valuation!

Very true, and this is where an assessment of barriers to entry into the market needs to be made. If there is open slather on competition, then high margins will be compressed violently and quickly as competitors move in to make their own buck out of the market.

But if the barriers to entry are high, then capacity for new competitors to come into the market and steal away customers from the incumbents will be low, which should mean margins stay higher for longer. I'm not sufficiently familier with Forge's operating patterns to even guess about the barriers to entry. However, given that Forge and its currently listed competitors (like Monadelphous, Worley-Parsons, Leighton Holdings, Cardno, MACA, etc, etc) all survive on their capacity to win tenders for contracts and then to deliver on those contracts (to establish a track record), on the face of it, it can be difficult for new entrants to win work away from established players, but the number of established players in the market means that in the long run, as management changes over time, a company with high margins now in the engineering space may not have those margins in the long term.

 

[Ves]

Very true, and this is where an assessment of barriers to entry into the market needs to be made. If there is open slather on competition, then high margins will be compressed violently and quickly as competitors move in to make their own buck out of the market.

But if the barriers to entry are high, then capacity for new competitors to come into the market and steal away customers from the incumbents will be low, which should mean margins stay higher for longer. I'm not sufficiently familier with Forge's operating patterns to even guess about the barriers to entry. However, given that Forge and its currently listed competitors (like Monadelphous, Worley-Parsons, Leighton Holdings, Cardno, MACA, etc, etc) all survive on their capacity to win tenders for contracts and then to deliver on those contracts (to establish a track record), on the face of it, it can be difficult for new entrants to win work away from established players, but the number of established players in the market means that in the long run, as management changes over time, a company with high margins now in the engineering space may not have those margins in the long term.

+1

But not only that employees and those they provide services too do everything they can to force prices / wages to move in their favour. They're already doing so. If miners cannot afford projects because of exhorbitant costs or cash flow issues, they just cancel them.

 

[tinhat]

I read about Chinese demand all the time. For some reason I never read about supply. It's almost as though iron ore markets exist with static supply but continously expanding demand. What happens when those new iron ores mines in Africa and Mongolia come online? You can buy a lot of miners at "less than $2 per day".

Not to change this into an iron ore topic, but I think the thing you need to look at for a commodity is marginal cost of production - which FMG, AGO, MGX etc shareholders are finding out.

 

[McLovin]

Not to change this into an iron ore topic, but I think the thing you need to look at for a commodity is marginal cost of production - which FMG, AGO, MGX etc shareholders are finding out.

I've seen anything from $20 to $60 quoted as being cash costs for ore in Africa. I admit, I don't spend much time on mining generally but we do seem to take an overly domestic view of iron ore, as though we are the supplier and China is the customer. Aren't BHP and RIO are operating down around the $40-$50/tonne mark, if I'm not mistaken?

 

[tinhat]

I've seen anything from $20 to $60 quoted as being cash costs for ore in Africa. I admit, I don't spend much time on mining generally but we do seem to take an overly domestic view of iron ore, as though we are the supplier and China is the customer. Aren't BHP and RIO are operating down around the $40-$50/tonne mark, if I'm not mistaken?

That's what I've heard. BHP about $40 and RIO a bit lower than that whereas the second tier producers are up around $80.

You've got to wonder at what stage the RBA becomes worried that the AUD is not adjusting to the terms of trade. The RBA could fix the problem any time it wanted to by cutting rates and stemming the carry trade. If it is worried about fuelling a property bubble then there is a solution for that too. We could go back to housing credit rationing like we use to have a long time ago to regulate the supply of credit to housing.

 

[McLovin]

African ore...

Most disclosed estimates of operating costs for west and central African iron ore
projects tend to be relatively low due to low labour costs and the high grade ore,
which requires little processing. African Free On Board7 (FOB) cost estimates range
from as low as US$20/t for the planned DSO material from Sundance’s Mbalam
project up to US$50/t for Sierra Leone’s Marampa mine8 (RBC Capital Markets
2011; Emery 2012). When shipping costs are included, west and central African iron
ore will, on average, cost around A$50-80/t.

http://www.eaber.org/sites/default/files/documents/HURST_AfricaFeO_EABER_FINAL_0.pdf

 

[Intrinsic Value]

I've seen anything from $20 to $60 quoted as being cash costs for ore in Africa. I admit, I don't spend much time on mining generally but we do seem to take an overly domestic view of iron ore, as though we are the supplier and China is the customer. Aren't BHP and RIO are operating down around the $40-$50/tonne mark, if I'm not mistaken?

I am in Paris at the moment and I am staying with the Project Manager for Rio Tintos iron ore project in Guinea.

I will ask him tonight what their estimated production costs are.

I asked him last night about iron ore prices and he said they were expecting prices to be over 100 dollars a tonne in the next six months or so.

Anyway do your own research.

There is still plenty of CAPEX out there despite some cutbacks. Wage costs are getting out of control in Australia anyway for a lot of these projects so a bit of a pullback may reduce some of the wage costs which are severely impacting projects bottom lines.

 

[Intrinsic Value]

I am in Paris at the moment and I am staying with the Project Manager for Rio Tintos iron ore project in Guinea.

I will ask him tonight what their estimated production costs are.

I asked him last night about iron ore prices and he said they were expecting prices to be over 100 dollars a tonne in the next six months or so.

Anyway do your own research.

There is still plenty of CAPEX out there despite some cutbacks. Wage costs are getting out of control in Australia anyway for a lot of these projects so a bit of a pullback may reduce some of the wage costs which are severely impacting projects bottom lines.

Okay so RT's cost per tonne in the Pilbara is roughly 18 dollars but for the African joint venture with the Chinese it is approx 45 dollars a tonne. He reckons BHPs Pilbara cost per tonne is around 30 dollars. FMG around 80.

So why are they doing the African joint venture? Because it is the second biggest iron ore deposit in the world and they want to be part of it.

 

[Ves]

Okay so RT's cost per tonne in the Pilbara is roughly 18 dollars but for the African joint venture with the Chinese it is approx 45 dollars a tonne. He reckons BHPs Pilbara cost per tonne is around 30 dollars. FMG around 80.

So why are they doing the African joint venture? Because it is the second biggest iron ore deposit in the world and they want to be part of it.

Thanks mate - that is actually quite scary. Because historically iron ore prices have sat just above the cost of production (obviously with a small profit margin for the producers).

If there is a heap of supply coming online in Africa from 2014 onwards - it is possible that some (or a lot) of mean reversion still could happen. I think it would be interesting to see what happened when the Japanese stopped having a huge hunger for our iron ore when they went through their growth spurt in the 20th century. Was there a severe correction in prices after a bubble of sorts?

 

[McLovin]

Okay so RT's cost per tonne in the Pilbara is roughly 18 dollars but for the African joint venture with the Chinese it is approx 45 dollars a tonne. He reckons BHPs Pilbara cost per tonne is around 30 dollars. FMG around 80.

So why are they doing the African joint venture? Because it is the second biggest iron ore deposit in the world and they want to be part of it.

Thanks mate. Those numbers certainly highlight my point. It's hard to see how the current prices are sustainable and the price driver will be on the supply side, IMO.

Thanks mate - that is actually quite scary. Because historically iron ore prices have sat just above the cost of production (obviously with a small profit margin for the producers).

And that's where it will head back to long term. The Chinese demand story is a short term thing.

I think we should start an FMG deathwatch thread.

 

[Trembling Hand]

And that's where it will head back to long term. The Chinese demand story is a short term thing.

I think we should start an FMG deathwatch thread.

Shame iron ore is not an open market like other commodities. Then all the evil hedgefunds and speculators could poor some of that cheap funny money into it from the Fed, ECB and BOJ. Save some companies and Oz in the process.

But its a closed shop. The irony.......

 

[Intrinsic Value]

Another thing to consider is the current strength of the AUD.

If the AUD falls then all the iron ore contracts are in USD so there is some potential upside there as well.

 

[tinhat]

I'm not able to log into my trading platform at the moment to look at the market depth, but FGE share price spiked yesterday arvo and again this morning. Looks like there may have been a couple of at market buy orders without much supply.

 

[jank]

This stock is being totally driven by market sentiment to mining services.
The market cap is $340 million, they have $140 million in cash as part of $480 million worth of assets.
They have 900 million worth of orders.
Yet the stock is now trading at below $4 a share.....

Anyone want to hazard a guess to when market sentiment will change? Will a new year will bring a new attitude.

 

[skc]

This stock is being totally driven by market sentiment to mining services.
The market cap is $340 million, they have $140 million in cash as part of $480 million worth of assets.
They have 900 million worth of orders.
Yet the stock is now trading at below $4 a share.....

Anyone want to hazard a guess to when market sentiment will change? Will a new year will bring a new attitude.

Several events I'd watch for.

1. China announces stimulus.
2. Iron ore goes back up above $150.
3. BHP announces that cap ex spending is back on.

And it's not just sentiment. There has been downgrade after downgrade in the sector. BLY, WOR, MAH, NWH, EHL and LYL (today), just to name a few. When the market shrinks, competition increases and margins decline. FGE will not be immune to it.

The chart is looking terrible and really threatening to break on the downside.

 

[jank]

Thanks, might stay clear of it so. I was just thinking at these prices shares in FGE would have a lot of upside to them. 3.83 is the 52 week low, can you see it go lower. It is already trading at a P/E of 6.9

 

[VSntchr]

Thanks, might stay clear of it so. I was just thinking at these prices shares in FGE would have a lot of upside to them. 3.83 is the 52 week low, can you see it go lower. It is already trading at a P/E of 6.9

P/E may be slightly irrelevant once the E component of that equation is squeezed a bit by a possible coming of margin compression and contract loss

 

[skc]

Thanks, might stay clear of it so. I was just thinking at these prices shares in FGE would have a lot of upside to them. 3.83 is the 52 week low, can you see it go lower. It is already trading at a P/E of 6.9

I am a perpetual risk-adverse bear so take what I say with a ton of salt...

BLY is trading at ~4.5x while WOR at ~17x. So FGE would probably trade somewhere in between...

 

[Intrinsic Value]

This stock is being totally driven by market sentiment to mining services.
The market cap is $340 million, they have $140 million in cash as part of $480 million worth of assets.
They have 900 million worth of orders.
Yet the stock is now trading at below $4 a share.....

Anyone want to hazard a guess to when market sentiment will change? Will a new year will bring a new attitude.

You know what I am going to say by my previous posts but FGE is a great stock but you might have to wait a while before it comes back into favour.

When it comes in favour again expect it to rocket up as it is very much undervalued.

Further there is still a huge amount of Capex in Australia and a lot of the Capex that was deferred or cancelled was marginal at best a. Further a little blip now is good for wages costs as well because wages have been getting way out of control on lots of Australian projects.

And the US is intent on continous stimulus until their economy gets boosted. This is good news for Australian miners because that probably means a rise in commodity prices in general.

 

[skc]

And it's not just sentiment. There has been downgrade after downgrade in the sector. BLY, WOR, MAH, NWH, EHL and LYL (today), just to name a few. When the market shrinks, competition increases and margins decline. FGE will not be immune to it.

The chart is looking terrible and really threatening to break on the downside.

Just adding to the list... FWD, ALQ, ASL, NFK...