FMG - Fortescue Ltd

[Value Collector]

Let me ask you this about what you think of the strategy of the 3 majors. Lets suggest for a moment that their sole intention is in fact to drown fortescue out of the market. It seems to me that its clearly evident at prices sub $50/tonne that the chinese have every intention of buying not only fortescue but every other viable mining company under duress regardless of what continent it sits on. It seems logical to me that every viable mine they send to the hands of the chinese is a nail in the coffin of their profits because its an extra tonne at lower prices that won't be purchased from them. If the chinese were to buy fortescue it would be an absolute catastrophe for the 3 majors because all of a sudden there is up to 200 million tonnes in circulation not subject to market dynamics anymore. I really don't grasp the strategy. They say its about market share but in fact they're not gaining market share - rather handing all their corporate power to their primary buyer. The strategy makes no sense to me??

I don't think they are trying to force Fortescue out, Bhp and Rio are only really completing projects they had already committed to before the big price drop, other smaller projects they commit to are just productivity based debottle necking stuff mainly.

Because their production cost is so low, even at these prices is makes sense to spend a little here and there to debottle neck and eek out a few more tonnes, FMG is doing the same thing.

When they say they are trying to protect market share, what the mean is they are trying to stop the high cost producers and low cost competitors from adding tonnes.

eg. The current price is about $60, at that price no high cost producer is going to add tonnes, Rio, BHP, FMG and VALE have the volume growth to them selves.

However, if Rio said it was going to be a nice guy and cut production 50Million Tonnes to support the price, the price would rise to $100, that would cause 50Million Tonnes of high Cost production to come back on line, the price would drop again and Rio would be sitting there earning the same per tonne but with smaller market share because they reduced production.

Rio and BHP have both said it's not up to them to cut production, they are the low cost guys, its up to the high cost guys to reduce, But its a balancing act, $49 Ore might cause 150M tonnes to leave the market, which would cause the price to rise back to $90, so the low cost guys have to add back 50M tonnes to bring the price back to $60 etc.

So we will see a fluctuating price, but High cost will leave during the lows and low cost will add on the upswings, But I am Confident Rio,BHP and FMG will all have good low cost businesses throughout the fluctuations.

 

[Value Collector]

As of Monday june 22, the port stocks have declined another 1.5%

 

[stit]

Re: FMG - Fortescue Metalss

As of Monday june 22, the port stocks have declined another 1.5%

So your basically saying that you believe that the majors are going to regulate the flow of supply to keep higher cost supply out of the market, rather than flood the market completely? I don't know that I've heard that theory before but may hold some credit given "supply interuptions" that have been inherent since the start of the year since the price dropped below $60.

Why would they not be better off at a $90 per tonne mark? I appreciate the theory re market share but what's the point of working harder for less or equal money?

What impact do you think that the Greece debacle will have on share value? The value has dropped a massive .60 in the last fortnight with no primary reason other than Greece and or people flicking fmg prior to the end if the financial year because it's been an atrocious performer? Not unless the stock is being heavily shorted again on the basis of likely lower ore prices?

 

[Value Collector]

Re: FMG - Fortescue Metalss

So your basically saying that you believe that the majors are going to regulate the flow of supply to keep higher cost supply out of the market, rather than flood the market completely?

I Believe they will continue deploying capital to add to their resource base, increase output through debottlenecking and increase output if it reduces total costs per tonne for as long as they are able to earn a decent margin and therefore a decent return on the capital employed.

Why would they not be better off at a $90 per tonne mark? I appreciate the theory re market share but what's the point of working harder for less or equal money

At $90 tonnes, everybody is going to be deploying capital to produce more, long term its probably not sustainable. If BHP and RIO tried to support the $90 price by reducing production, others would just fill the gap, FMG, VALE and everyone else would continue increasing as long as they were earning a decent return on each tonne, and all that would happen is RIO and BHP would have to keep reducing supply every year to maintain the price, and the less they produce the higher the cost per tonne.

What impact do you think that the Greece debacle will have on share value? The value has dropped a massive .60 in the last fortnight with no primary reason other than Greece and or people flicking fmg prior to the end if the financial year because it's been an atrocious performer? Not unless the stock is being heavily shorted again on the basis of likely lower ore prices

I don't think FMG have lost value in the last 2 weeks, they are still worth at least $6.00

What you are seeing is fluctuations in market price, Price is what you pay, value is what you get. Price and value are two separate concepts.

Do I think the Greek crisis will cause Market price for stocks and other securities to fluctuate? Yes

Do I think the Greek crisis will affect the long term earning power of most companies and there fore reduce their value? No

Will the Greek crisis have a large effect on the number of people that globally go to the movies this weekend and see Inside out or Jurassic World? will it cause people to eat less sushi in Sydney this week end? will less coca cola be sold at Wall mart? I don't think so the world economy will tick along just fine, and the economy needs iron

 

[notting]

Re: FMG - Fortescue Metalss

What impact do you think that the Greece debacle will have on share value?

Surely you don't think the old news Greece finale has much to do with this. China's market is now a bear market, rather abruptly. That is what is pushing the price down along with a retrace from the recent run up in the price of IO. That's what you should be focusing on.

Personally I consider China's stock market as becoming more relevant to China's economy, but still about 85% irrelevant.

 

[Trembling Hand]

China is in a real panic. Even their central bank.

China iron ore just gone limit down..... At least the falls are not going to get any worst...... today.

 

[stit]

Re: FMG - Fortescue Metalss

I don't think FMG have lost value in the last 2 weeks, they are still worth at least $6.00

What you are seeing is fluctuations in market price, Price is what you pay, value is what you get. Price and value are two separate concepts.


Ok - so we're now at the end of the financial year, and for this half its probably fair to assume an average iron ore value of $60 per tonne. If we adopt $41 production costs, fmg should be making $10/tonne. 60 x 85% = 51 - 41 = 10.

Run rate 165mt x 10/2 = 820m profit for the half. If they continue the general policy of paying a third in dividends, I'm estimating a dividend of around 7 - 8 cents for this half. That would take the total dividend for the year to 10 - 11 cents for the year. The last time the company paid this sort of annual dividend was in 2013 and the stock was worth around 4.75.

Do you agree with these numbers as rough estimates and what do you anticipate the value of the stock when this report is released, bearing in mind that in 2013 the price of i/o was on the way up?

 

[Value Collector]

Re: FMG - Fortescue Metalss

I don't think FMG have lost value in the last 2 weeks, they are still worth at least $6.00

What you are seeing is fluctuations in market price, Price is what you pay, value is what you get. Price and value are two separate concepts.


Ok - so we're now at the end of the financial year, and for this half its probably fair to assume an average iron ore value of $60 per tonne. If we adopt $41 production costs, fmg should be making $10/tonne. 60 x 85% = 51 - 41 = 10.

Run rate 165mt x 10/2 = 820m profit for the half. If they continue the general policy of paying a third in dividends, I'm estimating a dividend of around 7 - 8 cents for this half. That would take the total dividend for the year to 10 - 11 cents for the year. The last time the company paid this sort of annual dividend was in 2013 and the stock was worth around 4.75.

Do you agree with these numbers as rough estimates and what do you anticipate the value of the stock when this report is released, bearing in mind that in 2013 the price of i/o was on the way up?

I don't value a company by how much the dividend is.

In 2013, FMG hadn't finished developing its projects, and had more debt, and its production costs were significantly higher now. so it is in a more secure position.

I value a company based on its earning power not its dividend, and also they use that these earnings are going to be used for.

Eg, a company earning a $1, that can deploy that dollar where it can earn 20%, and pay no dividend is worth more than a company that earns $1 and pays 80cents dividend, and deploys the left over 20cents at 5%

 

[stit]

Re: FMG - Fortescue Metalss

I don't value a company by how much the dividend is.

In 2013, FMG hadn't finished developing its projects, and had more debt, and its production costs were significantly higher now. so it is in a more secure position.

I value a company based on its earning power not its dividend, and also they use that these earnings are going to be used for.

Eg, a company earning a $1, that can deploy that dollar where it can earn 20%, and pay no dividend is worth more than a company that earns $1 and pays 80cents dividend, and deploys the left over 20cents at 5%

Yes, I appreciate what your saying, but the primary reason in investing in a company is capital growth and dividend returns. Dividend returns is the primary driver of capital growth, without it public investment exits, capital growth is more difficult to achieve and share prices fall.

Do you think that fmg could reach the $6 share price value without paying a dividend between now and then?

 

[Value Collector]

Re: FMG - Fortescue Metalss

Yes, I appreciate what your saying, but the primary reason in investing in a company is capital growth and dividend returns. Dividend returns is the primary driver of capital growth, without it public investment exits, capital growth is more difficult to achieve and share prices fall.

Do you think that fmg could reach the $6 share price value without paying a dividend between now and then?

No, increasing earnings is the primary driver of capital growth. And the companies that retain earnings and deploy them at high rates of return will grow their earnings the most.

take Berkshire Hathaway as an example, it has not paid a dividend since the mid 1960's when it was $9 per share, now it's $204,000 per share and it earns more than $15,000 per share in earnings.

It has only grown it's earnings to $15,000 per share because it has retained every cent of earnings and deployed it into new investments where it can earn a high rate of return.

Yes, FMG could reach $6 without paying a dividend, if it focussed 100% of earnings into a mixture of clearing debt, adding to its assets (increasing reserve base, and development pipeline) and buying back its own shares, then yes it could go 20years without a dividend and the capital growth would be very good.

 

[joeno]

Re: FMG - Fortescue Metalss

FMG has been brutalised in the last few weeks. You guys reckon this is due to short term factors or long term debt issues?

 

[stit]

Re: FMG - Fortescue Metalss

No, increasing earnings is the primary driver of capital growth. And the companies that retain earnings and deploy them at high rates of return will grow their earnings the most.

take Berkshire Hathaway as an example, it has not paid a dividend since the mid 1960's when it was $9 per share, now it's $204,000 per share and it earns more than $15,000 per share in earnings.

It has only grown it's earnings to $15,000 per share because it has retained every cent of earnings and deployed it into new investments where it can earn a high rate of return.

Yes, FMG could reach $6 without paying a dividend, if it focussed 100% of earnings into a mixture of clearing debt, adding to its assets (increasing reserve base, and development pipeline) and buying back its own shares, then yes it could go 20years without a dividend and the capital growth would be very good.

Ok fair point.

As I speak it appears fmg is about to break an all new low.

Given it's all about profit are you expecting them to reach the $10 average per tonne profit this period?

 

[craft]

Re: FMG - Fortescue Metalss

FMG has been brutalised in the last few weeks. You guys reckon this is due to short term factors or long term debt issues?

Its all about the iron ore price.

You can’t value/price FMG without predicting the future price of Iron Ore. It’s hugely operationally and financially leveraged to Iron Ore Price. At a low enough Iron Ore price FMG will lose control of all their assets with no return for equity holders – at high enough Iron Ore Price equity holders will make a fortune. Whatever way you want to disguise it FMG is nothing more than a leverage bet on Iron Ore pricing and they will remain that way until they change the leverage in the business by lowering debt or lowering their position on the cost curve relatively to their competition.

 

[Value Collector]

Re: FMG - Fortescue Metalss

Its all about the iron ore price.

You can’t value/price FMG without predicting the future price of Iron Ore. It’s hugely operationally and financially leveraged to Iron Ore Price. At a low enough Iron Ore price FMG will lose control of all their assets with no return for equity holders – at high enough Iron Ore Price equity holders will make a fortune..

Yes, I basically agree, though it's more about the margin that FMG can make on a tonne, rather than the price of a tonne.

Offcourse the profit margin is affected by the price they can sell the tonnes for, but if the price of the tonnes is all you are watching you are only getting half the story.

I mean in the last 12 months the iron ore price has halved, which if you were just watching that you would see its a disaster, but at the same time FMG's production costs have halved, and will continue to reduce in the next 12 months.

No one knows for sure what the price of a tonne will be in the next 12 months, but we have a pretty good idea that FMG's production costs will continue to shrink. To Invest in FMG you have to have an opinion on the likely margin they will make, and that's a product of both price and cost.

In my opinion, as FMG continues to reduce cost, they will be pretty close to BHP and RIO in cost, and I think a lot of other supply can not survive at prices any where near FMGs Break even, so there is a very good chance Fmg will have a good average margin over time, and that's all they need.

$10 per tonne EBIT would be great, $20 per tonne = amazing returns.

Time will tell.

 

[Value Collector]

Re: FMG - Fortescue Metalss

Given it's all about profit are you expecting them to reach the $10 average per tonne profit this period?

I think for last quarter they would have done that easily.

But look, I am not expecting a quick turn around, as I have said, this is a 2 - 3 year play.

I wouldn't expect a full recovery in share price until FMG can book a full financial year at a profit margin of $10 or more.

It will be interesting to see the profit announcement for the last 6months and see what they decide to do with the dividend.

 

[Ald123]

The problem with allowing the iron ore price to collapse as it has, is that stockpiling is then undertaken by the buyers who know how expensive it has just been. The collapse was also caused on the excess supply side by vale mining in Brazil.

This means that the iron ore price will have difficulty moving out of what is essentially a new equilibrium, as long as ships can sail the seas and mines can function as they are, this is the long term iron ore price.

If Australians wanted to get themselves out of the situation they find themselves in now, which is giving the ore to China at below cost, (remember that Australians funded the infrastructure on the stock exchange and taxes and the royalties are minuscule) then they need to start using the ore internally in Australia and creating products which can be sold at massive profit.

 

[Value Collector]

The problem with allowing the iron ore price to collapse as it has, is that stockpiling is then undertaken by the buyers who know how expensive it has just been.
.

The stockpiles have actually been shrinking, which leads me to think that some of the price weakness has been because stockpiles are being eaten into.

The collapse was also caused on the excess supply side by vale mining in Brazil

FMG now has a delivered cost lower than Vale.

If Australians wanted to get themselves out of the situation they find themselves in now, which is giving the ore to China at below cost

,

The three big Aussie suppliers eg BHP, RIO and FMG, are not selling below cost.

(remember that Australians funded the infrastructure on the stock exchange and taxes and the royalties are minuscule) then they need to start using the ore internally in Australia and creating products which can be sold at massive profit

The mines and infrastructure have not been solely funded by Australians.

Australians, chinese and various other international investors provided the equity, and the bonds and debt financing is largely international.

If you want to invest in a steel works to use our ore go ahead, I am happier to sell the ore to china.

 

[stit]

The stockpiles have actually been shrinking, which leads me to think that some of the price weakness has been because stockpiles are being eaten into.




FMG now has a delivered cost lower than Vale.

,

The three big Aussie suppliers eg BHP, RIO and FMG, are not selling below cost.


The mines and infrastructure have not been solely funded by Australians.

Australians, chinese and various other international investors provided the equity, and the bonds and debt financing is largely international.

If you want to invest in a steel works to use our ore go ahead, I am happier to sell the ore to china.

With fmg currently sitting at near 12 month lows I assume you must be thinking that this must be an approximate floor for the price to go long on the stock for a long period? Why aren't you shorting the stock and making money on it during the next couple of years instead?

 

[Value Collector]

With fmg currently sitting at near 12 month lows I assume you must be thinking that this must be an approximate floor for the price to go long on the stock for a long period? Why aren't you shorting the stock and making money on it during the next couple of years instead?

I wouldn't risk shorting it, Because I believe it is significantly under valued. I have no idea where the markets will move, on monday or next month, but I am confident that this stock at some point will surge in value, and when it does I want to be long not short.

I have said it is a long term play for me, that just means I am happy to own the businesses for a long time, and I am confident I am going to do very well out of owning it. It doesn't mean that I know it will take a long time. it might take a long time, it might not. I don't know, I am terrible at timing the market in the short term, but generally pretty good at finding long term value plays.

I mean if you knew you could buy something that was worth $1Million dollars for $200K, but you might not be able to sell it for $1Million for up to 3 years, would you refrain from buying it? would you try and short it hoping it was going to go to $150K?

I don't think 3 years is a long time to wait to quadruple your money. FMG is probably going to pay a tax advantaged dividend better than I could get with bank interest over the next three years, plus a decent capital gain, that's good enough for me.

I would rather a bumpy ride that nets me over a 50% per year averaged return over the next 3 years, than a steady 3%

 

[Value Collector]

Iron ore Inventories at chinese ports were down by another 1.04% this week.

Less than 20 days supply, and a level not seen for almost 2 years.