FMG - Fortescue Ltd

[Value Collector]

So you don't share the common perception that ore is going to crash again at the end of the year assuming a price of $6?

No, the world needs Iron ore, and Rio, Bhp and FMG are the low cost producers, I believe where ever the price settles, it will be where these three can generate a sustainable return, plenty of other producers will leave the market before FMG is forced to.

People talk about FMG as if it still costs them 90/ tonne to produce, they focus on the fall in the Iron ore price but ignore the fall in the production cost which has offset most of the fall in the commodity price.

What price did you buy into go long at?

You been doing this long?

I didn't just buy into FMG outright, I have been selling put options on them since 2012 and collected a little over $200k in premiums, when the price dropped some of these options have been exercised.

All up I have spent about $450k, to purchase 123,000 FMG shares, but as I said $200k of that was from options premiums, so the net cost to me of my FMG shares is some where around $250k, that puts me at around $2.00 / share for the operation as a whole.

 

[stit]

No, the world needs Iron ore, and Rio, Bhp and FMG are the low cost producers, I believe where ever the price settles, it will be where these three can generate a sustainable return, plenty of other producers will leave the market before FMG is forced to.

People talk about FMG as if it still costs them 90/ tonne to produce, they focus on the fall in the Iron ore price but ignore the fall in the production cost which has offset most of the fall in the commodity price.



I didn't just buy into FMG outright, I have been selling put options on them since 2012 and collected a little over $200k in premiums, when the price dropped some of these options have been exercised.

All up I have spent about $450k, to purchase 123,000 FMG shares, but as I said $200k of that was from options premiums, so the net cost to me of my FMG shares is some where around $250k, that puts me at around $2.00 / share for the operation as a whole.

You seem pretty knowledgable and I appreciate your input.

I don't think that fmg share price has ever been at $7.50, but over the course of the last couple of years must have consistantly been clearing more than $10 per tonne ( particularly the 2014 financial year ). Why do you think that is when your expecting it to reach that now?

 

[Value Collector]

.

I don't think that fmg share price has ever been at $7.50

FMG has been as high as $13.15 (but that was in 2008, and at the time it wasn't worth that)

but over the course of the last couple of years must have consistantly been clearing more than $10 per tonne ( particularly the 2014 financial year ). Why do you think that is when your expecting it to reach that now

Simple, earnings.

FMG didn't reach it's 165 Million tonne run rate until march last year, and by that time the price of ore had already started it's down trend. For the FMG share price to get to $7.50, the market has to be confident that they will be able to sustain a profit margin of $10 or more, with a falling ore price, there was no confidence, although it did trade over $6 for a while.

So now that the capital expenditure is over, and FMG can focus on cutting costs, and maintaining a decent margin, I believe it is very likely they will start heading back towards $7.50 as it becomes clearer the Iron ore price has stabilised at sustainable margins and Fmg continue to reduce costs.

and if over a longer period of say 3 years, if Fmg enjoy a margin of closer to $20, and they pay some larger dividends and pay back a few billion of their debt, they could even go as high as $15.

I don't need it to get to $15, because $7.50 would make it a fantastic return for me, But if in 3 years it was $15 I will make over a $1,000,000. While I am not banking on it happening quickly, I there is a decent chance it could happen, so I am happy to hold as long as it continues to earn decent margins.

 

[notting]

I don't need it to get to $15, because $7.50 would make it a fantastic return for me, But if in 3 years it was $15 I will make over a $1,000,000. While I am not banking on it happening quickly, I there is a decent chance it could happen, so I am happy to hold as long as it continues to earn decent margins.

What will be your losses if it hits 70c?

Low-cost seaborne supply entering the market is not only displacing high-cost Chinese production, but also high-cost seaborne supply," Alan Chirgwin, BHP iron ore marketing vice president, told the conference. Supply will rise by about 100 million to 110 million tonnes this year, exceeding modest demand growth of about 30 million to 40 million tons, he said.

In other words, there is no upward from here.

 

[Value Collector]

What will be your losses if it hits 70c?



In other words, there is no upward from here.

If it hit 70c, and never recovered, I Would be down 160k, if it hits $7.50 I will be up over 600k.

As I have mentioned regularly here, I don't need a massive rise in Iron ore price, just a sustainable margin that's it.

 

[Knobby22]

The way to be rich in the Share market is to go against established thinking and get it right.
So good luck Value Collector.

 

[stit]

If it hit 70c, and never recovered, I Would be down 160k, if it hits $7.50 I will be up over 600k.

As I have mentioned regularly here, I don't need a massive rise in Iron ore price, just a sustainable margin that's it.

I read recently that rio still has some approvals outstanding in order to achieve it's run rate of 360m. I don't know how much merit it has or if you have heard something similar? Makes you wonder if this is twiggy's motive if it does with his political manoeuvring lately....

 

[notting]

I read recently that rio still has some approvals outstanding in order to achieve it's run rate of 360m. I don't know how much merit it has or if you have heard something similar? Makes you wonder if this is twiggy's motive if it does with his political manoeuvring lately....

Trust me the administration will do nothing.
Twiggy probably made a donation and Abbot is looking to look like he is looking into it.
Bluster.
It sits at an important retrace level right now IO is down on US$ strength as are all the commods.

 

[Potator]

It sits at an important retrace level right now IO is down on US$ strength as are all the commods.

I don't post much... Is there a good intra-day source of iron ore price? Because to me it sure looks like IO is still up off the lows and roughly the same price as when FMG was 20% higher a week ago:

http://www.barchart.com/charts/futures/ITIK15

Also the AUD is back below US 80c.

As an aside, aren't the other majors costing their shareholders profits by ramping up and selling more for a much smaller margin? (Not to mention the Aus tax man).

 

[Value Collector]

It sits at an important retrace level right now IO is down on US$ strength as are all the commods.

Port stocks are down by another 3.8% this week.

 

[ROE]

China Bankroll Vale mega expansion, cheap cheap price is here to stay

http://www.afr.com/business/mining/china-to-bankroll-vale-iron-ore-expansion-20150520-gh5leq

"More importantly, China will loan the company up to $US4 billion ($5 billion) to help fund a $US16.5 billion expansion called S11D. The project, which should be finished next year, will produce 90 million tonnes of high-quality iron ore that will be shipped to China at a cost almost as low as that achieved by industry leader Rio Tinto. "

 

[ROE]

As an aside, aren't the other majors costing their shareholders profits by ramping up and selling more for a much smaller margin? (Not to mention the Aus tax man).

No that is a smart business decision long term, take out all your rivals during down turn, you becomes stronger while everyone disappear, even more profit margin when the cycle turns.

The major making money even at this level and enjoy the benefit of wiping out smaller players.

DMP and FLT do that all the time, undercut their rival on price and slowly bleeding them out of the market. They get stronger as smaller guys disappear, can you get pizza cheaper than DMP ?
and you want to fight DMP on price, they take you on and then some more..

FMG tauting rio and bhp he is the third force in Iron ore to be reckon with during boom time, now they answer his call

 

[stit]

Trust me the administration will do nothing.
Twiggy probably made a donation and Abbot is looking to look like he is looking into it.
Bluster.
It sits at an important retrace level right now IO is down on US$ strength as are all the commods.

I can appreciate that they may do nothing at this juncture - but could see state governments in the future paying much closer attention to supply demand dynamics in the future when deciding on future mining approvals. I appreciate that a mine site is a very long term investment but could foresee that pending approvals for expansion could be put at risk in the future if the approval is outstanding in an oversupplied market. I can also see federal governments rejigging how they get paid on royalties moving from a cut of the price per tonne to a tiered system where the amount paid is geared via usage. e.g pay more over 200m tonnes increasing to 250m increasing to 300m and so on.

 

[notting]

The main thing to be thinking about is what demand looks like from China.
At present price of BHP, RIO, Vale and FMG are indicating negligible demand growth.

If the latest Chinese stimulus measures push demand higher then this would be a buying opportunity.

So far Xi has shown plenty of guts in resisting the old ways of overbuilding to achieve growth targets as well as discipline in many other areas of the Chinese economy, which is a good thing but not good for IO.

Twiggy is displaying plenty of acts of desperation which spells things are not good for FMG right here and now, not as good as the FMG managers are trying to pretend.

Twiggies backing of AGO looked like a desperate act of trying to show that no one is going broke and that someone muchy bigger should do the same and make a bid for FMG.

I suspect he is trying to help the Chinese think that they would be smart to buy FMG at this point cause it would allow them an influence on supply that is proving costly whilst they subsidise the Chinese miners to keep them in the game.

If there was going to be a sudden lift in demand from China they could do worse than buy it. But they are not!
So far that spells trouble.

 

[notting]

Oh Noooooooooo.

Vale Inks massive deal with China -

http://www.afr.com/business/mining/china-to-bankroll-vale-iron-ore-expansion-20150521-gh5leq

Andrew is left just so -



Moral of the story - Don't stand up at a Chinese banquet and call for a cartel.

 

[stit]

The main thing to be thinking about is what demand looks like from China.
At present price of BHP, RIO, Vale and FMG are indicating negligible demand growth.

If the latest Chinese stimulus measures push demand higher then this would be a buying opportunity.

So far Xi has shown plenty of guts in resisting the old ways of overbuilding to achieve growth targets as well as discipline in many other areas of the Chinese economy, which is a good thing but not good for IO.

Twiggy is displaying plenty of acts of desperation which spells things are not good for FMG right here and now, not as good as the FMG managers are trying to pretend.

Twiggies backing of AGO looked like a desperate act of trying to show that no one is going broke and that someone muchy bigger should do the same and make a bid for FMG.

I suspect he is trying to help the Chinese think that they would be smart to buy FMG at this point cause it would allow them an influence on supply that is proving costly whilst they subsidise the Chinese miners to keep them in the game.

If there was going to be a sudden lift in demand from China they could do worse than buy it. But they are not!
So far that spells trouble.

Maybe - personally i think he's a little bit more shrewd than to be that transparently desperate. I tend to think there is more than meets the eye than he's just being plain desperate. I think he's playing a long term political game trying to educate every australian that these two massive foreign owned companies are having a purge of smaller australian owned companies at the public expense - which is essentially what they are trying to do however you spin it - and he's striking while the iron is hot with a massive whole in the budget because of it. I think he's doing it so when they eventually come back to state and federal governments cap in hand - which they have to do sooner or later, they are heavily scrutinised. I dont think he's concerned about the viability of his company - again if he thought the company was doomed ( and he would know ) he would have cashed out his billions by now and sailed off into the sunset. Why would he continue with this charade if its days are numbered? What does he get out of it? To me the simple numbers tend to stack up for fortescue. The world currently needs 1.7 - 1.8b tonnes of seaborne ore. The majors intend on producing 400 + 360 + 290 + 180 = 1240. At sub $39 62% platts break-even - soon to be $34 and a demand of 1.8b tonnes - fortescue are too competitive to be drowned, with nearly every other producer on the earth underwater - I just can't grasp the fortescue doomsday logic. Yes china's appetite for ore may have peaked and on the decline, but its not going to just disappear. China's recent stimulus measures would indicate they are not prepared to let this sort of disaster happen.

 

[Value Collector]

Vale Inks massive deal with China -

It doesn't seem like it's something they would do if they believed there was an impeding decade long over supply, maybe the supply side is not what the bears think.

I think shows Vale is worried about it's own costs, with FMG's production costs likely to be less than Vale's in the next quarter and brazil continuing to be three times further from china, they are doing their best to reduce costs.

Do you think the consistent reduction of Iron ore inventories at the chinese ports says anything about the Iron ore supply? Down 3% in the last week is a decent move, could this have anything to do with weakness in price in the last 7 days? If it weakness is due to draw downs, How long can the weakness be sustained?

 

[stit]

Oh Noooooooooo.

Vale Inks massive deal with China -

http://www.afr.com/business/mining/china-to-bankroll-vale-iron-ore-expansion-20150521-gh5leq

Andrew is left just so -



Moral of the story - Don't stand up at a Chinese banquet and call for a cartel.

Hang on.........Am i reading this right in that the investment from china is to buy eight existing vale ships to help consolidate vale balance sheet woes because they've been making a loss, are struggling with capital expenditure and china wants to make sure they get their hands on higher grade ore than what australia produces? And what is the cost to vale in return for this? The story only seems to focus on the benefits?? I'm sure a $5b investment comes at a price....

 

[notting]

And what is the cost to vale in return for this?

Shipping. (The point of difference. The edge!)

China puts up prices to increase their own margines for shipping profits, harms Vale and buys into it to 'save it,' - Stealth attack (China all over.)

It's always seemed to me that BHP and RIO were concerned about Vale not FMG despite Andrews over inflated sense of self importance.
This does not seem to have been lost on the Chinese who have picked the genuine contender. FMG is a sad side show and will continue to be with all it's debt.

 

[stit]

Shipping. (The point of difference. The edge!)


This does not seem to have been lost on the Chinese who have picked the genuine contender. FMG is a sad side show and will continue to be with all it's debt.

Maybe...........but at least they continue to be in charge of all their own faculties. What your saying is that China considers Vale the most attractive weak link. Like Value says.........Who cares if your a sad side show making $10/tonne or 1.6b - 2b a year and in control of your own destiny.