FMG - Fortescue Ltd

[ROE]

Food for thought, I don't invest in resource but I do read about them and various other business

Does FMG cost of production including debt repayment? interest pay on debt + cost or cost of cash only?

If FMG said they can handle at the current price, why are they desperate to do a debt deal that is more expensive than the one they pulled out not long ago? they pulled out at 9% only to come back pay 10% and force to hand over asset for security...if that is not desperate I don't know what is...
They bluffed last time, thinking they can get away with cheap debt and they got called, it is a poker game they playing and the other player knows they has no hand and bluffed

at this sort of rate its junk bond stuff.

This hasn't change FMG risk, it just buying them sometimes and if Iron ore is this low, the longer it goes the risker it gets.

There is so much cost cutting you can do, you cant keep cutting cost forever, you need iron ore price rising at some point, when no one knows and that where the risk is.

I am not predicting doom day scenario but it look fairly risky still to be invested in FMG.

 

[pixel]

even more to the point: I can remember a time when borrowing more in order to repay earlier borrowings would land you in prison quick smart. Smells much like a Ponzi Scheme - except that it's done on a much larger scale. Maybe that makes it okay

 

[Value Collector]

Does FMG cost of production including debt repayment? interest pay on debt + cost or cost of cash only?

The break even price of $39 in their guidance includes interest on the loan, obviously principle would need to be paid back over time from the profit margin.

If FMG said they can handle at the current price, why are they desperate to do a debt deal that is more expensive than the one they pulled out not long ago?

Just to play on the safe side I guess, it's given them a lot more staying power if their margin do get compressed for longer than expected.

 

[Value Collector]

even more to the point: I can remember a time when borrowing more in order to repay earlier borrowings would land you in prison quick smart.

I call BS on that

When was bond refinancing illegal?

Companies have issued bonds to pay back old bonds for probably as long as bonds have been used in the capital structure of companies.

There is nothing illegal or immoral about refinancing early dated bonds with longer dated bonds.

 

[stit]

even more to the point: I can remember a time when borrowing more in order to repay earlier borrowings would land you in prison quick smart. Smells much like a Ponzi Scheme - except that it's done on a much larger scale. Maybe that makes it okay

If you had 2.5b would you lend it to a desperate company in dire straights? I think not. Sure any company lending money lends it at the appropriate interest rate to ensure adequate return for risk, and by industry standards atm the cost of the funds is expensive - but at the end of the day 2.5b is a sh*t load of money in anybodies books, and anybody that lent it and lost it would be in a world of pain themselves. Fortescue's story/position is no secret, but I'm sure the powers that be that conducted the due diligence on fortescue prior to this advance factored in a lot of "flesh" or movement in the transaction. The point being I'm sure they know a whole lot more than we do - certainly more than "analysts" that believe the company will fold in the next couple of years.

I think their original run at the refinance was at the end of march - since then the price of ore has declined close to $10 per tonne and recently rebounded. I can only assume that at $55 per tonne they were comfortable, at $46 maybe they were starting to panic a little. At the end of the day there doesn't seem to be an "authority" that has any idea on what the market is doing. On one hand you have the likes of citi citing a avg price of $37 and has revised that "prediction" more times than they've changed their undies, and this week the world bank citing a price of $63......$26 a tonne difference seems a big margin for me for "authorities" that should have a clue. I'm sure if the price got to $37 and stayed there as per citi forecasts, fortescue would struggle to raise funds. At $55 or above, i tend the believe maybe they'd be comfortable based on forecast profits. Given the volatility and uncertainty in the market at present - I'm not surprised they bit the bullet and put the matter to bed

 

[Klogg]

I call BS on that

When was bond refinancing illegal?

Companies have issued bonds to pay back old bonds for probably as long as bonds have been used in the capital structure of companies.

There is nothing illegal or immoral about refinancing early dated bonds with longer dated bonds.

Agreed - I can't see what's wrong with rolling over debt.
The risk involved in not being able to roll it over is a different story, but it's not a ponzi scheme. Ultimately, the interest payments are funded by cash flows.

If you had 2.5b would you lend it to a desperate company in dire straights? I think not. Sure any company lending money lends it at the appropriate interest rate to ensure adequate return for risk, and by industry standards atm the cost of the funds is expensive - but at the end of the day 2.5b is a sh*t load of money in anybodies books, and anybody that lent it and lost it would be in a world of pain themselves. Fortescue's story/position is no secret, but I'm sure the powers that be that conducted the due diligence on fortescue prior to this advance factored in a lot of "flesh" or movement in the transaction. The point being I'm sure they know a whole lot more than we do - certainly more than "analysts" that believe the company will fold in the next couple of years.

Assuming the guy who approved the loan is rational is probably not a good starting point. For all we know, he works for a huge bank and write a certain amount of credit to ensure a bonus. Add to that, he plans to work for another year or two before retiring, so he doesn't really care if they default in 5 years.
This is just one example, but a very possible one at that.

Incentive caused bias (along with other biases) can cause some fairly irrational decisions.

 

[coolcup]

While the debt may seem expensive, it is very inexpensive compared with their alternative - a deeply discounted rights issue to an equity market that is deeply unsure about the company's prospects. The long term impact on ROE through a discounted rights issue would be far greater than a higher rate on their borrowings.

Also suspect that Twiggy can't fund his pro-rata share of any equity raising, so that was never going to be plan A anyway.

 

[stit]

Agreed - I can't see what's wrong with rolling over debt.
The risk involved in not being able to roll it over is a different story, but it's not a ponzi scheme. Ultimately, the interest payments are funded by cash flows.



Assuming the guy who approved the loan is rational is probably not a good starting point. For all we know, he works for a huge bank and write a certain amount of credit to ensure a bonus. Add to that, he plans to work for another year or two before retiring, so he doesn't really care if they default in 5 years.
This is just one example, but a very possible one at that.

Incentive caused bias (along with other biases) can cause some fairly irrational decisions.

To assume that one person would sign off an advance of 2.5b on their own is ridiculous - it just doesn't happen like that at any level. This would have been thoroughly researched over a long period of time by a full board of unbiased independent decision makers - i would suggest this was in the pipeline in parallel with the previous float for a number of months prior to it becoming public. It just didn't spring up in the month of April - it's just that this one saw the light of day for whatever reason that the fortescue board of directors chose. Its a similarly ridiculous notion of the american investment giant capital buying a 7% stake worth over $350m that the mail boy made the decision to make that investment as some people would like to think. The fact is that these companies investing millions and billions into the one entity are privy to a lot more information and inner workings that any of us will ever be and is based on a viable commercial decision rather than a retirement bonus

 

[galumay]

...The fact is that these companies investing millions and billions into the one entity are privy to a lot more information and inner workings that any of us will ever be and is based on a viable commercial decision ...

Be careful with assumptions like that, the sort of biases that Klogg mentioned are in play!

 

[stit]

Be careful with assumptions like that, the sort of biases that Klogg mentioned are in play!

Im new to share trading but been in banking my whole career. Unless the board of directors making these investments don't value their million dollar salaries - then maybe your right and they would choose to sacrifice their careers for someone else's Christmas bonus

 

[galumay]

Im new to share trading but been in banking my whole career. Unless the board of directors making these investments don't value their million dollar salaries - then maybe your right and they would choose to sacrifice their careers for someone else's Christmas bonus

You are missing my point slightly, not saying they would specifically make poor decisions for someone's xmas bonus, rather that assuming they are making rational decisions, based on more knowledge and based on a viable corporate decision is a dangerous assumption that flies in the face of what we know about human psychogy and biases in decison making.

A short reflection on the excesses and failings of corporate banks around the GFC shows the danger of this assumption!

 

[stit]

You are missing my point slightly, not saying they would specifically make poor decisions for someone's xmas bonus, rather that assuming they are making rational decisions, based on more knowledge and based on a viable corporate decision is a dangerous assumption that flies in the face of what we know about human psychogy and biases in decison making.

A short reflection on the excesses and failings of corporate banks around the GFC shows the danger of this assumption!

This is true - but since the gfc credit regulations and guidelines have been tightened ten fold to avoid a repeat of exactly what your talking about. Loose credit decisions are very much a thing a the past. I'm not saying that bad decisions aren't inevitably made - but initially they're always made on sound commercial decisions. Typically in the case of fortescue being " higher" risk the interest rate is higher but the tolerance in assesment against risk and scrutiny on the worse case scenario is much higher. I can assure you that if an advance went bad and procedures were not followed in line with the organisation making the adcance coupled with much tighter government regulations than pre gfc heads would roll coupled with civil liability with potential criminal liability for those that made the decision. I'd bet my house this has been in the works for months and every aspects if the business has been gone over with a fine tooth comb. That's beside the fact that were talking about a 2.5 b Dollar advance - a mere drop in the ocean

 

[galumay]

Loose credit decisions are very much a thing a the past.

Ok, well lets just agree to differ then!

 

[notting]

Pushing out maturity is undoubtedly a positive but "we forecast a cash burn of circa $US1.6 billion over financial years 2016-18 that could make refinancing the 2019 debt challenging"
"At spot prices (about $US54/t versus Citi estimate of $US40/t for the next few years) Fortescue would generate cash of about $US1.5 billion, but would still face a significant refinancing in 2019 – iron ore price of about $US80/t is required to generate enough cash to retire debt."

Wilkins has a $1 price target.

UBS price target of $1.70 for the stock.

"The facilities that Fortescue intends to retire have interest rates of 6.0-6.875%," Yesterdays announced facility attracts an interest rate of 9.75% pa an increase in FMG's annual interest bill of ~$US90m or ~$US0.60/t ( at an annual output rate of 160 million tonnes)."
"This would take FMG's interest bill to ~US$4.60/t and leads to a 10% reduction in annual after tax earnings."

As a result, they estimate the miner's cash breakeven price at around $US45 per dry metric tonne for the benchmark iron ore price, based on today's exchange rate of US77.6 cents.

I don't think any one thinks IO will see 80 again for short to medium term which would take us very close to D day.
Debt repayment day.

 

[stit]

I don't think any one thinks IO will see 80 again for short to medium term which would take us very close to D day.
Debt repayment day.

A reasonably balanced article with reference to how accurate "analysts" have been over the past 12 months

http://www.businessspectator.com.au...urces-and-energy/has-iron-ore-found-its-floor

 

[Value Collector]

I don't think any one thinks IO will see 80 again for short to medium term which would take us very close to D day.
Debt repayment day.

They are, and look like they will continue generating positive cashflow, so they will be able to retire debt as they go along, and if the total can't be retired they can just refinance the remaining balance with another bond before it is due, just like they did in the past few days, they have 4 years before anything is due.

You seem like you're trying to make out that there is this make or break "d-day" around the corner, but they just demonstrated that they can refinance their bonds, even in the worst of times, in 4 years total debt will be a lot less than it is now, refinancing won't be a problem, he'll it may not even be needed.

 

[qldfrog]

They are, and look like they will continue generating positive cashflow, so they will be able to retire debt as they go along, and if the total can't be retired they can just refinance the remaining balance with another bond before it is due, just like they did in the past few days, they have 4 years before anything is due.

You seem like you're trying to make out that there is this make or break "d-day" around the corner, but they just demonstrated that they can refinance their bonds, even in the worst of times, in 4 years total debt will be a lot less than it is now, refinancing won't be a problem, he'll it may not even be needed.

VC I would buy the idea of perpetual debt (aka capital never repaid, just interest) for a "normal" business but for a mining company, resources decrease and go to zero unless you purchase/find some more assets, moreover, you have a "real" depreciation of your infrastructure: belt to change, rusting structure, fleet to renew;
Not to say that Fortescue is doomed but I can not agree on the idea of a mining company working on an interest only repayment plan

 

[Value Collector]

VC I would buy the idea of perpetual debt (aka capital never repaid, just interest) for a "normal" business but for a mining company, resources decrease and go to zero unless you purchase/find some more assets, moreover, you have a "real" depreciation of your infrastructure: belt to change, rusting structure, fleet to renew;
Not to say that Fortescue is doomed but I can not agree on the idea of a mining company working on an interest only repayment plan

Firstly, I am not saying they will have perpetual debt, I am just saying that if is came to 2019, and they had only repaid $3billion of the $4billion, they could just refinance the remainder.

but, look Both Rio and Bhp have debt on their balance sheets that you could call perpetual, debt is a almost permanent part of the capital structure, bhp just refinanced the other day.

if a mining company had one mining lease, and no plans or hope for future growth, then yes it must clear its debt by the time the mine is exhausted. But if the mining company owns enough resources where it will be deploying capital and mining for the next 100 years, and owns infrastructure that will be operating for 100 years, and continues exploration etc, then it can have bond holders as a permanent part of its capital structure.

 

[tinhat]

Another thing to keep in mind with Iron Ore, especially all these second tier producers and their cost reduction initiatives, is how much of that apparent cost reduction is attributable to the recent collapse in the oil price. When oil recovers then so too will the cash costs for these producers.

 

[Miner]

I did not visit Bell site until now to see they have actually recommended FMG as A SPECULATIVE buy when the price was $1.95 with a prediction to go up $2.48 against previous prediction $1.95. Ironically FMG has dived down to $1.85 today. I still value technically FMG is a good value at today's price . But I am disregarding BP's prediction with their covering up to call it a speculative recommendation. What is a joke because they (BP) have not done research enough. This reinforces my comment on this thread earlier that brokers' recommendation to be always taken with a pinch of salt. With Europe crashing on Friday, probably Monday will give the bargain hunters an opportunity.
Please see attached.

Apparently "analysts" suggest chinese mines are not reducing output magnifying the glut...............

http://www.scmp.com/business/commod...h-iron-ore-output-falls-134-cent-imports-rise

Would be amusing if the price has actually bottomed at $46 after they've all just fallen over each other to out do each other on their latest forecasts

When you showed me his original argument for Fortescue, I said he was missing the case for lower costs, atleast he gets it now

I don't know if we have bottomed yet, although I think we may have, but I am confident that where ever the price settles it will be where FMG make a good margin, and it may end up being a very good margin, every $ FMG can make per tonne, adds $0.75 to their value.

FMG thread is getting hotter and gives the opportunity to look into each of them to get great values from different angles.
I noticed there was a thread citing UBS prediction of FMG to reach $1.
As previously suggested by me, if we rely on the prediction of these brokers then the investment or trading pattern will be dwindling like another volatile share price. I wonder why these analysts publish host of data to prove their point and change next day ? In the same newsletter for example, from Bull Weekly, I have noticed a scrip has been rated as buy, sell and hold by three different analysts.
Attached are few reports from Bell Potter - very talent analysts
On 8 MARCH they said FMG as hold, 6 March as buy (no speculation and solid research Hey ??) and then again 16 April it becomes a BUY but with SPECULATIVE note on it. In one week's time who consumed lots of red or vodka ?
I can read the analysts reports but not putting money unless it is designed and made for me. That does not help . I engaged a planner from BT and paid very high fee for my whole super. He consolidate and charged another 2.5% fee just to be taken over by me now to manage the super as a wrap account paying only less than 1% fee with much better average 16 % return (averaging after -84% AGO, - 45% BNO, -33 % MYR and -30% MIN). I have learnt a lot recently from ASF threads on AGO and FMG and moving ahead.
Enjoy the attachments and researches