FMG - Fortescue Ltd

[Miner]

With the volume of FMG shares that are traded everyday, it's very hard to believe a newsletter aimed at retailer investors can move the FMG price.

May I ask why you believe this is foolish banter?

Dear Klogg

Good questions
Not sure if you have followed a publication called Potterphillip and they publish quiet a few newsletters. I have often found 5 out of 10 times when they publish something exciting news about a trade, that goes up drastically. The publisher beat their drums and then price falls through. But yes, I agree with you that to change FMG type share's huge volume no newsletter could probably influence.

Secondly, foolish banter !!! Not my words. Motley Fool newsletter www.fool.com always declare that the readers are fools and they publish foolish banters. I copied the text from their public domain.

Now hopefully FMG has come to a good low price to give my tipping a good start for May

 

[joeno]

Can't figure out what's going on with this stock. Was about to pull the trigger at 1.85 but decided to wait a day and it skyrocketed up a few days after to 2.6. Now it's back down a bit but seems like it will rally again despite the lower Iron Ore prices and stronger dollar. Think i'll wait until the price stabilizes.

 

[Value Collector]

Can't figure out what's going on with this stock. Was about to pull the trigger at 1.85 but decided to wait a day and it skyrocketed up a few days after to 2.6. Now it's back down a bit but seems like it will rally again despite the lower Iron Ore prices and stronger dollar. Think i'll wait until the price stabilizes.

Welcome to the forum.

not sure why you would want to wait until prices "Stabilise" if your a trader I would think you would be looking to take advantage of the volatility, and if your an investor, you should just be ignoring the volatility and getting in while you can buy below what you think the value will be when it finally does stabilise.

I mean, if you think that FMG will eventually have a stable business with good margins once their cost cutting is finished and the iron ore price has stabilised, then it's best you get in before the market for their shares has stabilised at a much higher price, If you don't think FMG will have a business, then you shouldn't want to get into them at all, even if the share price was stable.

To me volatility does not mean "risk", it is there to be taken advantage of or just ignored completely.

 

[Miner]

FMG betrayed me today. Instead going down and supporting my tipping price on the start day it went up more than 9% . Totally unfair as I was hoping to get it rock bottomed by 1 May when tipped it .

Any way on the serious front, we are often extremely critical on FMG (as I write, think of departed Julia who often helped me to get English grammar and syntax corrected through PM - will miss you coach) why don't we put the same salvo on Rio or latest one Vale.

http://www.mining.com/vale-falls-victim-of-the-iron-ore-slump-posts-3-2bn-loss/

Is it because in the core of our hearts some of us are jealous on Andrew Twiggy's wealth but never raised a finger on Rupert Murdoch minting money in a foreign land and criticising Australia, or James Packer spending fortune on casinos ? Just my thought .

 

[stit]

FMG betrayed me today. Instead going down and supporting my tipping price on the start day it went up more than 9% . Totally unfair as I was hoping to get it rock bottomed by 1 May when tipped it .

Any way on the serious front, we are often extremely critical on FMG (as I write, think of departed Julia who often helped me to get English grammar and syntax corrected through PM - will miss you coach) why don't we put the same salvo on Rio or latest one Vale.

http://www.mining.com/vale-falls-victim-of-the-iron-ore-slump-posts-3-2bn-loss/

Is it because in the core of our hearts some of us are jealous on Andrew Twiggy's wealth but never raised a finger on Rupert Murdoch minting money in a foreign land and criticising Australia, or James Packer spending fortune on casinos ? Just my thought .

To be honest I think there is a real school of thought out there that blames fmg for the current iron ore slump. I think people assume that if you take 160m tonnes out of the market that maybe there would again be a short supply in the market and the remaining three could continue to manipulate prices and reap massive returns at their discretion. If you read the bs that gets carried on about fortiscue on the macro business website all they carry on with is how fortescue's days are numbered and how theyre wrecking Australia in the interim. When I hear the other three carry on about producing more to avoid somebody else producing it, I think they're referring directly to fortescue. Lets face it, fortescue was built on the others dregs and has grown into a company that is too big to drown now that their costs are forecast at 39/ t and I think it really irritates them. Every other company except fmg can be squeezed out of the market without the earth being scorched. Without fmg things would be just as rosy as it was a few years ago - and I think that's what irritates people the most

 

[Klogg]

If you read the bs that gets carried on about fortiscue on the macro business website all they carry on with is how fortescue's days are numbered and how theyre wrecking Australia in the interim.

I must say that I do agree with at least half of their argument - the supply side dynamic. (Forecasts for demand are just that, forecasts. The supply side is far more visible.)

If you read Buffett's shareholder letters (I think it's early 90s, but I couldn't find the exact paragraphs), he talks about the supply/demand of commoditized business - in his case, insurance. It goes something like this:
- a major catastrophe occurs, and insurers that under-estimated the payouts required go bust.
- no additional supply is brought into the market, but demand continues to increase slowly
- eventually margins improve
- upon margins and sentiment improving, insurers realise this and move to create more supply (i.e. raise capital in this case, if required)
- supply continually comes on-line until margins are squeezed, premiums don't adequately cover costs and the first point occurs again

Now insurance has a very quick turn-around time from the time you decide to increase supply and when it's available to customers; mining on the other hand, is very different.

We've had a number of years where there has been a large margin to be made because of this excess demand. Others see these margins, and decide to mine and sell their own (increase supply). Over years they start developing mines, eventually selling to the market after years of building the mining site - resulting in a huge increase in supply, much larger than would be the case in insurance, because of time to market.

And of course, like insurance, oversupply (which MAY occur, remember I didn't forecast the demand side of this) over a long duration means lower prices, up until higher cost producers go bust.

I don't know, and won't even hazard a guess as to how much excess supply there will be (or if there will be any) after the period of excess demand that we've experienced. If you're able to get that right, then there's definitely money to be made. But it's a rather big if, and a big downside risk.

Add to all of this, that Jim Chanos, a man famous for his ability to identify a company in trouble, has shorted this company (albeit at a much higher price), and I don't know if the risk/reward is justified.


(This is not a shot at those invested in FMG, but rather me posting my risk-averse thoughts on this particular scenario).

 

[tinhat]

There is no such thing as excess demand or excess supply in a commodity market, at least not in the long run. I've been listened to Twiggy on the radio yesterday and it's all propaganda and spin and good old fashioned rent seeking from the government. In the short term disequilibrium can be created as in the latest price slump when buyers, seeing price deflation, run down inventory and postpone purchasing anticipating that price may drop further. Producers, fearful that prices will drop rush to push their inventory onto the market.

At the end of the day, producers who have a business case that can supply at a marginal cost below what they forecast the long term price will be will invest in production hoping to make a profit. That is what FMG did. That is how the company came about. There are only three major producers who can supply the market at lower cost: RIO, BHP and Vale. As long as global demand exceeds the output of those three producers and other major sources of supply don't come online with a cost structure lower than FMG, FMG will have a market. What profit it will make is another issue. Remember that in a commodity market, price equals the marginal cost along the industry cost curve. There is always someone who hasn't gone broke but isn't making any money either. It's a very simple equation over the short term. Grab one of the industry cost curves that UBS and others publish. Find the level of global demand for IO at any given time. Observe that producer's cash cost per tonne and that gives you the market price. That producer isn't making any profit. Every producer to the left on the industry cost curve is in profit and every producer to the right is making a loss and their supply is unsustainable at that price.

 

[Klogg]

There is no such thing as excess demand or excess supply in a commodity market, at least not in the long run.

If this was the case, then we could keep adding supply without the price changing. I'm not quite sure I follow the argument to be honest...
The only way this makes sense to me, is if we're talking a really long time. If the time span is long enough, you'd almost cover the cyclical nature of the business.

As long as global demand exceeds the output of those three producers and other major sources of supply don't come online with a cost structure lower than FMG, FMG will have a market. What profit it will make is another issue.

I agree with all of this. My question is, how can you be sure what profit FMG will make? If you get it wrong, you've got a highly leveraged company running at negative OCF.

Find the level of global demand for IO at any given time. Observe that producer's cash cost per tonne and that gives you the market price. That producer isn't making any profit. Every producer to the left on the industry cost curve is in profit and every producer to the right is making a loss and their supply is unsustainable at that price.

Agree with you on this point. My question is, does FMG come out of this OCF positive? If so, by how much?
And remember, IO demands are just forecasts, prone to the same errors as every other forecast. Nobody forecast an IO price of $50-$60 1-year ago.


All this said, I really do hope FMG thrives. Twiggy is great for the country.

 

[tinhat]

If this was the case, then we could keep adding supply without the price changing. I'm not quite sure I follow the argument to be honest...
The only way this makes sense to me, is if we're talking a really long time. If the time span is long enough, you'd almost cover the cyclical nature of the business.

Without getting into an argument over semantics, a commodity market (where the product is generic by definition) will always find a clearing price for the additional supply because demand is price elastic so the market will always find a clearing price at which the supply will be absorbed. In the short run supply is relatively inelastic but demand is always price elastic. In practice demand will at some point become saturated even at zero price. I remember going back a few years ago a day when traders at Flemington Markets (Sydney) were giving away their tomatoes (a perishable good which cannot be stockpiled) because demand had become completely saturated. Iron ore on the other hand can be stockpiled.

 

[stit]

[There are only three major producers who can supply the market at lower cost: RIO, BHP and Vale.]

Does vale really produce at a lower cost than fortescue? Last I heard was that fortescue was still in the black and vale was in the red to the tune of $3.2b!!!! I don't know much about their cost structure, but have seen estimates that at one point were similar to fmg. I have also heard arguments that their cost of production will come down after expansion. Whatever the case by the next quarterly report they'd certainly want a vastly different outcome. If it was fmg making a proportionately similar loss the stock wouldn't be worth five cents.

 

[tinhat]

[There are only three major producers who can supply the market at lower cost: RIO, BHP and Vale.]

Does vale really produce at a lower cost than fortescue?

Personally, I have no idea. The accepted wisdom up until recent times was that Vale was lower landed cost into China than FMG but that may have changed. At the end of the day, I guess it makes more sense to look at marginal cost in terms of individual mines if one assumes that port and rail infrastructure is a sunk cost. Individual mines can always be shut down or brought back online.

 

[McLovin]

There is no such thing as excess demand or excess supply in a commodity market, at least not in the long run. I've been listened to Twiggy on the radio yesterday and it's all propaganda and spin and good old fashioned rent seeking from the government. In the short term disequilibrium can be created as in the latest price slump when buyers, seeing price deflation, run down inventory and postpone purchasing anticipating that price may drop further. Producers, fearful that prices will drop rush to push their inventory onto the market.

Hmm...That view pretty much relies on the twenty years to 2003 being an outlier to the downside, and the 2008-2014 period being "normal". Even in 2007 the iron ore price was below $50.

 

[Value Collector]

[There are only three major producers who can supply the market at lower cost: RIO, BHP and Vale.]

Does vale really produce at a lower cost than fortescue? .

My understanding of Vale is that they have a wide range of production cost in their portfolio of mines.

eg. Some is high grade, low cost stuff that requires little processing before being shipped, How ever some of there mines produce very low grade that requires significant processing to make it into higher grade pellets.

it's a very different process to the Pilbara operations of FMG, RIO and BHP.

 

[stit]

"My understanding of Vale is that they have a wide range of production cost in their portfolio of mines."

It certainly changes the market dynamics if vales average cost of production is in fact the highest of the majors inclusive of fmg. Obviously this is why they have spoken about curtailing 30 million tonnes of production, however with a 3.2b loss and previous cost of production estimates in the $50's i suspect it may well be a lot more than 30 million tonnes currently being produced in the red. Personally I think that the next report from Vale may well be the single most influential piece of information for the future price of iron ore.

 

[Value Collector]

from the 40second mark in this video you can see a USA pelletizing plant working.

The process is used in areas that have low grade Iron Ore.

 

[Value Collector]

"My understanding of Vale is that they have a wide range of production cost in their portfolio of mines."

It certainly changes the market dynamics if vales average cost of production is in fact the highest of the majors inclusive of fmg. Obviously this is why they have spoken about curtailing 30 million tonnes of production, however with a 3.2b loss and previous cost of production estimates in the $50's i suspect it may well be a lot more than 30 million tonnes currently being produced in the red. Personally I think that the next report from Vale may well be the single most influential piece of information for the future price of iron ore.

Transport is another cost that Vale have to deal with, take a look at a globe, and you can see Brazil is 3 times the distance to china.

 

[Ves]

Transport is another cost that Vale have to deal with, take a look at a globe, and you can see Brazil is 3 times the distance to china.

Isn't that why Vale built a fleet of massive ships and is in the process of modifying China's ports (now that docking restrictions have been reduced) to significantly drop shipping costs?

As far as I recall reading in the AFR, the drop in oil price made Vale the cheapest producer in the world.

 

[Value Collector]

Isn't that why Vale built a fleet of massive ships and is in the process of modifying China's ports (now that docking restrictions have been reduced) to significantly drop shipping costs?

Yes, they are doing that to try and reduce the currently wide spread in shipping costs, It won't put them on par though, especially because FMG has 4 of the VLOC on order also.

As far as I recall reading in the AFR, the drop in oil price made Vale the cheapest producer in the world.

It's reduced the cost of all the producers. all the miners have been issuing reports showing large reductions, FMGs cost savings are the most impressive though.

I guess it depends on the timing of when the Author of the article saw Vales cost reduction, if it was before the others stated their reductions, then for a few weeks Vale might have looked cheaper.

 

[Ves]

Yes, they are doing that to try and reduce the currently wide spread in shipping costs, It won't put them on par though, especially because FMG has 4 of the VLOC on order also.



It's reduced the cost of all the producers.

Here's a view that appeared in Bloomberg earlier this year.

The cost of freight for capesize vessels from Brazil to China has dropped below $10 a wet metric ton for the first time since January 2009, compared with about $5 a ton for Australia to China, Macquarie Group Ltd. analysts said in a Jan. 9 note. Vale can now ship a ton of iron ore to China cheaper than BHP “for the first time in many years” and is close to challenging Rio as the lowest cost supplier, Macquarie said.

http://www.bloomberg.com/news/artic...eapfrogs-rio-bhp-as-cheapest-iron-ore-shipper

 

[tinhat]

Hmm...That view pretty much relies on the twenty years to 2003 being an outlier to the downside, and the 2008-2014 period being "normal". Even in 2007 the iron ore price was below $50.

Index Mundi's data is that in 2007 iron ore was US$36.63 (Iron Ore Fines 62% FE spot CFR Tianjin port, US Dollars per Dry Metric Ton). What I am suggesting is that at that time, that was the marginal cost of production along the industry cost curve for whatever global volume of demand there was in 2007. What I am also suggesting is that the price of iron ore in any period you chose to look at is "normal".