FMG - Fortescue Ltd

notting · 23 December 2014

As far as I can see at these levels it's making enough money to manage it's debt and that's about it.
I don't regard that as profit.
FMGs ore isn't the spot price quality and so they get less per ton than BHP and RIO.
When it comes to restructuring that debt, when interest rates may not be so accommodating, well it will be in strife (Even if China continued it's massive overbuild of ghost cities and so forth which it will not)
I suspect FMG will lumber along as a non profit organization and see 60c at some point. Not sure what the time frame will be, it depends on how much the Chinese demand to maintain the slow motion housing crash.

Value Collector · 23 December 2014

notting said:
the mine would never be 'active' for 100 years regardless of any scenario 25 at best.

there are more than a 100 years of resources in the Pilbara, existing mines will be producing for decades, plus new developments as the older mines are depleted, exploration will continue to prove up more resources also, FMGs train lines and port will be busy for over 100 years easily.

As far as I can see at these levels it's making enough money to manage it's debt and that's about it.

No, they are making a profit even after their interest payments,

FMGs ore isn't the spot price quality and so they get less per ton than BHP and RIO.

I know, I have factored all that in.

When it comes to restructuring that debt, when interest rates may not be so accommodating, well it will be in strife.

That's not for a very long time, and they would have cleared a bunch debt by then, even at todays iron prices. Not to mention production costs continue to fall, and the low oil price is a windfall for them at the moment.

I suspect FMG will lumber along as a non profit organization and see 60c at some point. Not sure what the time frame will be, it depends on how much the Chinese demand to maintain the slow motion housing crash.

I don't agree with you at all, but time will tell, you make your bets and I will make mine. The fact that a lot of people agree with you at the moment is making a fantastic opportunity for me.

notting · 23 December 2014

Value Collector said:
I don't agree with you at all, but time will tell, you make your bets and I will make mine. The fact that a lot of people agree with you at the moment is making a fantastic opportunity for me.

I was short it but closed it out. So I'm not speaking my book just yet.
Good luck to you!

tinhat · 29 December 2014

Value Collector said:
We all have our opinions, and when you feel your right you have to back yourself, no point being right if you don't have a position, or only have a token position.

IMHO you need to also be willing to accept when you get it wrong too. Backing yourself also means being willing to make a rational decision to recognise when you've made a bad call.

Value Collector said:
they are not running at a loss yet, but hence why I made reference to prices remaining sustainable.

commodities are cyclical, high prices won't stay around forever, and neither will low prices, and if there is a part of the world that's going to be the lowest cost producer and be the base for sustainable iron ore production, it the Pilbara, and FMG's infrastructure is there.

Low prices won't stay around forever, but they might stay around for the next 25 years. Personally, I have no idea.

FMG have no control over the price of iron ore and I've learnt the hard way recently not to treat any miner or resource market as a long term bet.

Good luck. I don't share your enthusiasm. I'd be looking for a bounce in the short term.

McLovin · 30 December 2014

McLovin said:
Boom!

And so it begins...

https://www.aussiestockforums.com/forums/showthread.php?t=8383&page=16&p=727506#post727506

Only took a week.

Whatever happened to Anaconda Nickel?

Assuming the price drop is temporary, which is a big assumption, IMO, my question is how long can FMG sustain a price squeeze?

And this from a couple of years ago when we had the discussion originally (in the FGE thread)

McLovin said:
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".

Intrinsic Value said:
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 said:
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?

Discussion here...

https://www.aussiestockforums.com/forums/showthread.php?t=8383&page=16&p=727506#post727506

This iron ore price drop seemed pretty predictable a couple of years ago.

Value Collector · 6 January 2015

tinhat said:
IMHO you need to also be willing to accept when you get it wrong too. Backing yourself also means being willing to make a rational decision to recognise when you've made a bad call.

.

offcourse, but you shouldn't accept you are wrong just because the market disagrees with you, you accept you are wrong when the real world outcomes of the underlining business operations fail to produce the returns you need for your investment to bear fruit over the time frame you originally had in mind and there fore not have a chance of acting as a satisfactory investment.

Low prices won't stay around forever, but they might stay around for the next 25 years. Personally, I have no idea

.

I have no idea on prices either, I don't need prices to rise though, All I need is for FMG to be able to make a satisfactory margin between their production costs and their sale price.

As I said, I believe the Pilbara operators will be able to rationalise the costs that have been bloated in the rush to bring ore to market fast, and the price will eventually settle at a price where the low cost Pilbara operators, including FMG will make a decent margin on the tonne's they ship.

notting · 6 January 2015

What would be most useful is to know what the all in costs are.
That means admin, interest payments, cost of getting the stuff out and to their one customer - China.

Then you have to consider what is stated above, the huge amount coming online just from RIO and BHP alone is enough to keep prices where they are now. Let alone Vale and Africa and bigger ships to make shipping cheaper from those places.

If that isn't enough the real possibility of a slow down in consumption of IO which for the large part is saddled to the Chinese overbuild.
China is making progress in raising wages and moving to a consumer model. This means moving away from building ghost cities which were part of the corruption that pumped up property in the ghost cities through propaganda in the communist controlled media to the people, so the communist cronies made a killing selling empty concrete cells to the brainwashed emerging middle class masses.

It really is a perfect storm.

What you see with oil has some parallels with the oversupply, but not so much with the utter dependence on one mad country building ghost cities to take the money back off the people and back into the dictators pockets.

I'm thinking IO ain't much different to rare earths, all things considered and rare earths an't that rare and neither is IO and not a business you'd want to be in right now unless you can control supply.
Apart from the Big Three all the other guys were under the illusion that IO would stay around the 80c mark minimum. Producing the high grade IO, at cost for the big boys, as with coal, is not out of the question at all.

There are still these analysts crapping on about how consumption hasn't slowed and all this BS. It will and it doesn't have to for there to be a coal like effect, coal and rare earth consumption hasn't slowed either!

This is s dangerous space.

Wysiwyg · 22 January 2015

FMG breaking below the previous $2.25 low today and what appears to be a 5 day flag formation. No volume on the break so far so could be a falsey. Wouldn't like to bet on it being a false break down though. Down trending stock in most cases = buy low, sell lower.

notting · 29 January 2015

For now, at least, FMG can sell iron ore for more than it costs to produce. So getting a bit of a relief rally, but once interest rates on its 9.1 Billion debt are considered it's not such a rosy situation as todays reaction thus far suggests. Survival is all that is happening for the moment.
Future development will be costly in order to get the medium and long term ore shipped which they are curbing development of for the moment. Better hope IO goes up from here, unlikely!

Value Collector · 29 January 2015

notting said:
For now, at least, FMG can sell iron ore for more than it costs to produce. So getting a bit of a relief rally, but once interest rates on its 9.1 Billion debt are considered it's not such a rosy situation as todays reaction thus far suggests. Survival is all that is happening for the moment.
Future development will be costly in order to get the medium and long term ore shipped which they are curbing development of for the moment. Better hope IO goes up from here, unlikely!

Based on the production costs from todays report, and the Iron ore price today, they are earning about $8 / tonne, that's after interest payments.

Not to mention they have just paid down another $500M in debt, that should generate another $25M in cost savings alone.

If the cost savings they say they are getting for this quarter continue, they will be earning over $12 / tonne at todays price.

These margins are still very healthy, By my calculations on the way things stand today, every $1 in margin the are earning should equal about $0.75 in market value of the stock, So if they can maintain an $8 earnings margin that values them at $6 / share, $12 earnings margin is $9, things have to deteriorate a lot further to make their current price fair value.

I am happy to hold at this point, I think that FMG still have further to go in its cost reductions, and when the Iron price finally stabilises they will be making a decent margin some where above $8 a tonne, and todays price will look like a bargain.

notting · 29 January 2015

When the December quarter began IO prices were at around US$85 They are now at around US$63. The miner said today it received about $US63 per tonne for its product in the December quarter, implying the business is profitable at those prices.

Take a further 20% off that if prices do not improve.
How's that looken?

Value Collector · 29 January 2015

notting said:
When the December quarter began IO prices were at around US$85 They are now at around US$63. The miner said today it received about $US63 per tonne for its product in the December quarter, implying the business is profitable at those prices.

Take a further 20% off that if prices do not improve.
How's that looken?

In the December quarter production costs were $45 / DMT (they are lower now, but I'll use this figure)

Current ore prices are a little over $62, FMG are currently getting 89% of this due to grade discount, but we will use 85% to be safe, because that's the average, which means current price received would be about $53.

That equates to a margin of $8, based on last quarters production price and todays selling price.

However the production cost continues to decline, $38.46 is the current production cost forecast for this quarter, if the sale price remains the same that equals a margin of $14.50

So you have to have a much lower price before the current share price would be considered accurate, and the price has to stay there long term, not just hit a low temporarily.

As I have said before, the Pilbara operators will continue to reduce production costs, Asia can not do with out their ore, so where ever the price ends up, it will be above the Pilbara production cost.

notting · 29 January 2015

OK, fair enough.
What about the new language with respect to demand weakening and stock piles still surprisingly high in China who is pretty much their only customer.
Along with RIO and BHP and Vale ramping up supply aggressively price rising is unlikely being more likely to be weaker for a long time, still OK? Wonder how much FMG have available to ship without further mine developments which will require further capital? These mine developments have been curbed in the face of the questionable feasibility at this price.
Isn't the cessation of such development at these IO prices an indication that it is not feezable going forward unless prices of IO rises again. Which it may not for decades.

Value Collector · 29 January 2015

notting said:
OK, fair enough.
What about the new language with respect to demand weakening and stock piles still surprisingly high in China who is pretty much their only customer.
Along with RIO and BHP and Vale ramping up supply aggressively price rising is unlikely being more likely to be weaker for a long time, still OK? Wonder how much FMG have available to ship without further mine developments which will require further capital? These mine developments have been curbed in the face of the questionable feasibility at this price.
Isn't the cessation of such development at these IO prices an indication that it is not feezable going forward unless prices of IO rises again. Which it may not for decades.

Demand isn't shrinking, its just growing more slowly, more iron is being used everyday now, than this time last year. But yes supply has grown faster than demand, hence the price weakness.

Stock piles have shrank by more than 10% in recent months.

Fmg's mines are some of the youngest in the pilbara, plenty of life to run in them, not to mention developments around existing mines that would utilises the same rail, ports and even power stations and processing facility etc.

The cessation of some mine developments means at this price its not the best time to bring on more supply, but as the numbers show this price is still profitable. Even if the price doesn't rise.

notting · 29 January 2015

I'v heard there has been a slight drop in demand recently from China not just a drop in increasing demand.

So your saying without any further development FMG has like 10 years of mine life left at these volumes?

As far as I know, BHP and RIO are rather concerned that Vale who is halfway through construction of a $US19.49 billion expansion in the Carajas will allow it to produce at US18MT, using mega tankers and with a lower oil price shipping costs will make Vale, the worlds biggest producer, able to easily out price the closer located AU Pilbara setup.

It seems that BHP and RIO are trying to squeeze the price now in order to make the 19.49 billion spend for Vale difficult to manage on current earnings leading up to it's completion and commencement. It's hard to understand why else RIO and BHP are pretty much throwing mountains of IO at China. So the price could go and stay a fair bit lower for 20 to 30 years just on the supply glut.

Personally I think the demand side will weaken significantly given the move away form mega over construction in China.

Red dirt aint worth what it used to be.

Value Collector · 29 January 2015

notting said:
I'v heard there has been a slight drop in demand recently from China not just a drop in increasing demand.

So your saying without any further development they have like 10 years of mine life left at these volumes?

As far as I know, BHP and RIO are rather concerned that Vale who is halfway through construction of a $US19.49 billion expansion in the Carajas will allow it to produce at US18MT, using mega tankers and with a lower oil price shipping costs will make Vale, the worlds biggest producer, able to easily out price the closer located AU Pilbara setup.

It seems that BHP and RIO are trying to squeeze the price now in order to make the 19.49 billion spend for Vale difficult to manage on current earnings leading up to it's completion and commencement. It's hard to understand why else RIO and BHP are pretty much throwing mountains of IO at China. So the price could go and stay a fair bit lower well for 20 to 30 years.

Personally I think the demand side will weaken significantly given the move away form mega over construction in China.

I know the media say a drop in demand, but really it is a slowing in demand growth, same with oil, we are using 1% more oil everyday now than this time last year, but we are producing 2.5% more, hence price weakness.

Fmg's mines have probably have about 20years to run on current reserves, but like most mines they will probably expand that reserve base at those mines, plus most of their capital is invested in the port, railway and other infrastructure, that will still be operating after the current mines are depleted.

FMG has a resource base that would last for almost a century, but yes that requires more mines, but as I said the port and railway would still be utilised,

FMG has its own mega ships in the pipe, plus Brazil in still a lot further away than the pilbara,

Rio, bhp and FMG, are still throwing ore at china because it is profitable for them to do that,

The players who will drop of of the market the the highest cost producers, thats not Bhp, rio or FMG.

notting · 29 January 2015

Other little guys falling over are irrelevant. Given the ramp ups from BHP, RIO and VALE.
Question is is FMG going to be one of them.

"Iron Ore price is too low for the good of the industry, Western Australia and Australia" - Nev Power

Sounds kind of desperate and hardly an endorsement of the business at current levels.

Is almost a desperate call to the WA Administration to hold back RIO and BHP to save FMG and it's jobs.
Also Nev said, "Price should stabilise after Chinese New Year." Not sure why, it's not like the big boys are going to cut back.

You can glean quite a bit from the 'involuntary nuances' over 'assurances,' that everything is swell look at the books, which it should be at face value.
So why is it so bad for everybody?

Not convinced, but you make a reasonable argument.

nulla nulla · 30 January 2015

How much oversupply will there be when Gina Rinehearts mine comes into production?

Value Collector · 30 January 2015

nulla nulla said:
How much oversupply will there be when Gina Rinehearts mine comes into production?

i guess that depends on how much growth in demand there is between now and then, and how many of the high cost mines decide to shut down production in china or decide not to reopen in spring after the winter shutdowns.

notting · 11 February 2015

ANZ has downgraded its 2015 and 2016 iron ore price forecasts by 24 per cent and 30 per cent to an average of $US58/tonne and $US60/tonne respectively.

‘‘The market has been hit by substantial new iron supply entering the market in a weakened demand environment,’’
Traditional high cost Chinese iron ore swing supply is also not responding ”” either lowering costs or being sheltered by more profitable steel mill owners.
While the price slump has been dramatic and hard to monitor, 85 per cent of the seaborne market is still making money, making it difficult to conclude that it looks oversold.

Looken a little shaky.

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notting

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