FMG - Fortescue Ltd

[notting]

But it's well worth getting to the top of either of the two giant steel structures, where the ore is separated from the waste to deliver a higher quality iron for Chinese steel mills. From here you get one of the best views in Western Australia's Pilbara.

Perhaps they should diversify and build a hotel.

 

[notting]

Pessimism or Realism?

Pessimistic people who hold its debt, have been offering the miner a big discount on its debt repayments.

Fortescue started taking advantage of this in September, when it bought back $US384 million of debt at a 20 per cent discount, meaning it only had to shell out $US305 million.

The miner was at it again this week, buying back $US439 million of debt for $US338 million (a 23 per cent discount), and $US311 million of other debt for $US280 million ( a discount of 10 per cent).

"It is like paying your mortgage back at 82.4 cents in the dollar," said Fortescue's chief financial officer Stephen Pearce, when asked about the trend on Wednesday.

Clayton's default - Get in first :homer:

 

[skc]

Pessimism or Realism?
Clayton's default - Get in first :homer:

What a great side business by FMG.

1. Issue debt at par... who cares about the interest rate?
2. Market value of debt falls as FMG leverage increased.
3. FMG re-purchase back at discount.
4. Free money!!!

 

[VSntchr]

What a great side business by FMG.

1. Issue debt at par... who cares about the interest rate?
2. Market value of debt falls as FMG leverage increased.
3. FMG re-purchase back at discount.
4. Free money!!!

LOL!

What about when they want to access leverage in the future? I guess the market does have a short memory though doesn't it...
In fact it'll probably be the same guys offering up the $$$

 

[Knobby22]

Fascinating.
if they can get more offers - doo a rights issue and retire the debt. Why the hell are they still paying a dividend?

They are only breaking even at the moment. Can they run the mine on a minimal level without mothballing?
In a few years they might be in a good position.

 

[fiftyeight]

More pondering about things I dont know much about

If there is a credit tightening, are the debt holders more likely to want to reduce exposure and therefore offer FMG a discount? Or will they want to maximise profits from FMG and not offer any more discounts? Or is this like asking "how long is a piece of string?"

 

[Value Collector]

More pondering about things I dont know much about

If there is a credit tightening, are the debt holders more likely to want to reduce exposure and therefore offer FMG a discount? Or will they want to maximise profits from FMG and not offer any more discounts? Or is this like asking "how long is a piece of string?"

If interest rates go up, the price of existing bonds should go down.

For example, is the interest rates on US treasury bonds went up to 6%, would you pay full price for some other companies 5 year bond that also had an interest rate of 6%, probably not because it's a riskier asset that a government bond, so you might want a 12% return to offset some of the risk you are taking, to achieve that you have to buy the bond for half price.

that's what is happening now, FMG's bonds are being discounted for risk, probably way to much discount, so they are buying back their bonds for less that face value, it's actually a wonderful thing to be able to do.

New bonds will be issued by various entities every day at interest rates reflecting market conditions, what ever the prevailing interest rate is, will affect the buy/sell price of the older bonds trading in the market.

 

[notting]

Such BS they way they report costs at 15 per mton.
All in costs, including interest on debt are the only costs worth knowing.
That's what it cost to make this much. That's all that fricken matters. Cut the bs.
Barely breaking even to pay the cost of the debt, without paying off any more debt.
Increased their dividend too, dick heads. Put it in the goddamn bank or buy someone else bonds. to help service the debt.

Apart from that. Doing a great job running in front of the tidal wave.

 

[fiftyeight]

If interest rates go up, the price of existing bonds should go down.

For example, is the interest rates on US treasury bonds went up to 6%, would you pay full price for some other companies 5 year bond that also had an interest rate of 6%, probably not because it's a riskier asset that a government bond, so you might want a 12% return to offset some of the risk you are taking, to achieve that you have to buy the bond for half price.

that's what is happening now, FMG's bonds are being discounted for risk, probably way to much discount, so they are buying back their bonds for less that face value, it's actually a wonderful thing to be able to do.

New bonds will be issued by various entities every day at interest rates reflecting market conditions, what ever the prevailing interest rate is, will affect the buy/sell price of the older bonds trading in the market.

Wow missed this reply sorry VC. Thanks for the detailed response

 

[Value Collector]

Such BS they way they report costs at 15 per mton.
All in costs, including interest on debt are the only costs worth knowing.
.

They do a pretty good job of breaking all the costs down on slide 9 of the investor presentation, the breakeven price is important but the rest is good to know also.

That's what it cost to make this much. That's all that fricken matters. Cut the bs.
Barely breaking even to pay the cost of the debt, without paying off any more debt.

Break even price is going to be somewhere around $29 a tonne soon, they are earning pretty good margins at the moment, net debt reduced by $1.1 Billion in the last 6 months, I can't see them having any debt troubles if this rate of debt reduction continues.

Increased their dividend too, dick heads. Put it in the goddamn bank or buy someone else bonds. to help service the debt.

What's wrong with the divvy? they are sticking to their pay out ratio, 30% paid out 70% for debt reduction.

Apart from that. Doing a great job running in front of the tidal wave

I have said it all along, FMG's scale will allow them to reduce costs to below the long term price of Iron ore, if FMG can't earn a decent margin, neither can most of the global industry, FMG isn't a junior marginal producer, the market relies on their tonnes,

Free cashflow for the half was 44cents, this company is worth a hell of a lot more than its current share price, value is building up every day inside this company.

 

[notting]

They do a pretty good job of breaking all the costs down on slide 9 of the investor presentation, the breakeven price is important but the rest is good to know also.

Yeah thanks for all those pointers.
My gripe is with the CEO who kept barking at every opportunity - 15 WMT which is deliberately misleading.
They are doing a good job but they should be buying back as much debt as possible.

China’s surplus capacity in steel making, for example, is bigger than the entire steel production of Japan, America and Germany combined. Rhodium Group, a consulting firm, calculates that global steel production rose by 57% in the decade to 2014, with Chinese mills making up 91% of this increase. In industry after industry, from paper to ships to glass, the picture is the same: China now has far too much supply in the face of shrinking internal demand.

And as China tries to dump it on everyone esle -

One option is for China’s zombies to export their overcapacity. But even if the Chinese keep their promises not to devalue the yuan further, the flood of cheap goods onto foreign markets has already exacerbated trade frictions.
The American government has imposed countervailing duties and tariffs on a variety of Chinese imports.
India is alarmed at its rising trade gap with China. Protesters against Chinese imports clogged the streets of Brussels in February.
There is also pressure for the European Union to deny China the status of “market economy”, which Chinas government says it is entitled to after 15 years as a World Trade Organisation member (that's what you get for letting the evil pricks in), which would make it harder to pursue claims of blatant Chinese dumping.

I repeat, everything should be going into paying off the debt!
Remembering FMG has only one customer!

 

[Value Collector]

Remembering FMG has only one customer!

not really, they have multiple steel mills they sell to.

I think what you are trying to say is China is their only customer, but china is a country not a customer, the customers are the steel mills of which there are many, and FMG has also started shipping to other nations also.

Also, this customer "China" you speak of, is a world leader in manufacturing and exporting, so by default if "china" is your customer, the world is your customer, not to mention that "one customer" makes up 20% of the worlds population, and your product is the back bone of its economy suddenly I don't see the risk.

 

[Value Collector]

An interesting point to note,

FMG is now earning the same profit margin on $50 Iron ore as it used to earn on $100 Iron ore, yet their share price is still about 3 times less.

RIO who is now earning considerably less at $50 than they were at $100 (because there production cost was already very low) has not suffered such a large reduction in share price.

So at $50 per tonne, FMG is just as profitable as they used to be at $100, but the share price is still very low, I think this makes FMG a super undervalued sleeper stock at the moment, I am super Happy to hold at the moment.

 

[sinner]

An interesting point to note,

FMG is now earning the same profit margin on $50 Iron ore as it used to earn on $100 Iron ore, yet their share price is still about 3 times less.

RIO who is now earning considerably less at $50 than they were at $100 (because there production cost was already very low) has not suffered such a large reduction in share price.

So at $50 per tonne, FMG is just as profitable as they used to be at $100, but the share price is still very low, I think this makes FMG a super undervalued sleeper stock at the moment, I am super Happy to hold at the moment.

Isn't the margin only relevant in context of good volume over the life of the security? They could have a 1000% profit margin but if would not be very useful if they are only selling 1 kilo every year?

 

[sinner]

not really, they have multiple steel mills they sell to.

I think what you are trying to say is China is their only customer, but china is a country not a customer, the customers are the steel mills of which there are many, and FMG has also started shipping to other nations also.

Also, this customer "China" you speak of, is a world leader in manufacturing and exporting, so by default if "china" is your customer, the world is your customer, not to mention that "one customer" makes up 20% of the worlds population, and your product is the back bone of its economy suddenly I don't see the risk.

But there are obvious issues with overcapacity (to put it mildly) at those mills, and their rather questionable business models which are funded by state banks forced to lend by the government on criteria that have nothing to do with viability...

 

[Value Collector]

Isn't the margin only relevant in context of good volume over the life of the security? They could have a 1000% profit margin but if would not be very useful if they are only selling 1 kilo every year?

FMG is also producing more volume than they were before the price drop, their mines are young and they have a lot of resources on the books for future development, they could maintain 165 million tons per annum for decades probably more than 50 years, there is plenty of ore in the pilbra and fmg has the most tenements.

 

[notting]

Last year China’s steel industry, which accounts for more than half of global production, reduced production for the first time since 1981. The government has set a target of cutting 150m tonnes of production in the five-year plan to 2020.

Wang Guoqing, director of research at Lan Ge Steel Information Research Centre in Beijing, estimates that one in 10 steel workers face being laid off. She added that solid statistics are hard to come by after the government stopped reporting steel employment figures at the end of 2013.

Can't imagine why they would stop reporting the figures, can you?
I guess you cold draw a long bow and think that possibly it's worse than one in ten!
As long as FMG customers are none of these, then happy be.!

 

[Value Collector]

Can't imagine why they would stop reporting the figures, can you?
I guess you cold draw a long bow and think that possibly it's worse than one in ten!
.!

Employee count isn't a good indicator of production, over time operations in most industries (especially in china) have increased production while lowering total employee count.

As wages rise in china automation is reducing the amount of labour needed to produce at the same level, as the steel price has reduced it makes sense they would be looking to cut costs and their labour bill would be a main target.

 

[notting]

Employee count isn't a good indicator of production, over time operations in most industries (especially in china) have increased production while lowering total employee count.

As wages rise in china automation is reducing the amount of labor needed to produce at the same level, as the steel price has reduced it makes sense they would be looking to cut costs and their labor bill would be a main target.

The Chinese have also been consolidating all the smelters to assist with pollution reduction.
So all your analyses stacks up as usual.

 

[Value Collector]

Fortescue finished with a Bang today, up 23% for the day.

Perhaps the market is waking up to the fact that they aren't going to go bust and are instead earning a decent margin, maybe some big short sellers are scrambling to bail on their positions.

The company has done a great job at reducing costs, as I said earlier they currently are earning about the same profit per tonne at $50 tonne as they were when they were selling it for $100 / tonne, add to that the debt reductions and the current price still looks very cheap, I can see them heading north to over $6 which would still be very cheap if iron ore price holds over $50.

Time will tell, but I am happy to hold this company, I can see value generation inside this company that is not reflected in the share price at the moment.

----------------------------------

One negative to the market waking up to their good position is they may not be able to continue to get discounts of their debt purchases, I was pretty happy while the negative nellies held the floor, I was happy to sit back and let the market talk itself into selling it's bonds back to us at a 20% discount.