FMG - Fortescue Ltd

[notting]

Was an insane day.
After a ripping week like last week you normally expect a bit of consolidation on the Friday afternoon and Monday morning at the very least. Especially if it is heading into resistance and a yearly high.
Any one short on the opening today should have sh@t their pants as it opened higher and simultaneously broke resistance at $2.65 and by the looks of they did it did!!

Remembering they are producing a lower grade product than RIO and BHP and have been changing mining techniques by reducing waist removal to Ore production which is not sustainable.
They will have to move more waist to Ore mined than they did at much higher cost levels to get rid of the surplus waist as well as moving normal amounts of waist for future Ore.
Not sure how long they can sustain that for before they have to raise costs and mine normally!

Further the market seems to be thinking that China is going back to it's old ways and heading into another real estate acceleration through easy money to everyone!
This is also an internal perception with the Chinese too, with those who have money and who also went sick on Shanghai real estate over the last month under the impression that finally the dictators have capitulated and resorted to going back to their old way of faking the economy.
They think the dictatorship has capitulated and is going to allow the mad building like before. This is a mistake and when the market realizes this isn't going to happen -
Be selling and back short.

 

[Value Collector]

Remembering they are producing a lower grade product than RIO and BHP.

That's built into their break even costs already, if you look at the break down of costs on slide 9 in the investor presentation, it accounts for the grade discount.

and have been changing mining techniques by reducing waist removal to Ore production which is not sustainable.
They will have to move more waist to Ore mined than they did at much higher cost levels to get rid of the surplus waist as well as moving normal amounts of waist for future Ore.

What you are referring to is over burden removal, lowering overburden is not where most of their cost reduction has come from, the over burden removed will increase slightly it will add about $1 per tonne next year, but they predict this will be more than offset but cost reductions and improvements in other areas.

Their new blending stratergy and improved ore processing actually allows them to mine lower grade ores than they could in the past, so their mining cost reductions are sustainable, the "high grading" (only mining the good 10% of their deposit) accusations made last year have proved to be a myth, they aren't high grading at all, they have improved their processing and blending and its allowing them to mine more of the low grade ore.

 

[Wysiwyg]

Over 100% gain in 31 trading days for a top 100 company is not common. All those sellers just wiped off the face of the earth.

 

[notting]

Over 100% gain in 31 trading days for a top 100 company is not common. All those sellers just wiped off the face of the earth.

WOR and MIN too.

AZJ is the only one, looking like you'd expect at this point. Was week Friday and today midst the massive 2 day rally on the big ones. Being a transporter you'd think if things were looking brighter it would be moving too.
Hence you could suspect at this early stage it's all just price speculation and nothing fundamental. A weaker US$ on a some dovish FED talk after the market tantrum about the Fed hike, I see no reason for them not to hike again, which will reverse it all by kicking the US$ back up.
It's a traders paradise!

 

[sinner]

Over 100% gain in 31 trading days for a top 100 company is not common. All those sellers just wiped off the face of the earth.

The FMG beta to the iron ore price is very high. Iron Ore futs listed on the SGX did about 19% today according to ZH, after limit up moves on all Chinese exchanges.

My , very likely the move was influenced by expectations around this weekends China National Peoples Congress, but I doubt many heavy players would be foolish enough to be short into an event like the NPC. Much more likely that interested participants would use todays move to initiate such positions.

 

[Value Collector]

, but I doubt many heavy players would be foolish enough to be short into an event like the NPC. Much more likely that interested participants would use todays move to initiate such positions.

I think it has just become clear that FMG is not a marginal producer, and can compete at the lower end cost of the field with rio and BHP, they aren't going bust they are earning good margins.

Also, the Chinese government in their new 5 year plan mentioned specifically that they want to rationalise or exit inefficient and loss making industries, people's minds immediately jump and think this means steel mill closures and a negative effect on the iron ore price.

I think the opposite is true, the steel mill closures willbe very limited, and they will choose to make these more efficient rather than close, but they will close the many loss making Iron Ore mines.

There is still a whole host of Chinese mines with production costs up near $100 / tonne, these are prime targets for closure, this will take a lot of Iron ore off the market, and provide support for the Iron ore price at levels where rio, BHP and FMG can make good money.

FMG with a break even of $29 is worth a lot more than its current price if iron stays above $50, this is what the market is realising all of a sudden.

FMG makes about $0.75 free cashflow for every $1 that iron ore is above their break even point, that's about $123,000,000 on their 165,000,000 tonnes of production, and it means for every $1 above their break even they average, their shares are worth about $0.65 so with an ore price in the $50's you can see they are super under valued.

No time to be shorting in my opinion, the market will fluctuate offcourse, but man there are some super strong fundamentals at play here going against you in my humble opinion.

It's also not just Chinese mines that are struggling, less scrap is moving around the world, as mines in countries like the USA are struggling to compete with low ore prices, USA steel mills are using more local scrap, meaning less is available for export to China.

 

[notting]

Unbelievable IO Spot move



It is following the steel price!!!.
Why is steel going up in China? Well because they have implemented a curb on over production. OMG :dunno::bonk:

Where are the brains?
That means less IO required. Still expect a 15% jump ........ that's the market

Besides that I'm not disputing the value of FMG given that this (price action) buys it even more breathing space.

AGO was up 46% today, but I don't think anyone is realizing it is a great business all of a sudden!!
Don't lose perspective! But trade away.

Oi Oi Oi!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

[Value Collector]

AGO was up 46% today, but I don't think anyone is realizing it is a great business all of a sudden!!
Don't lose perspective! But trade away.

FMG and atlas are worlds apart, I wouldn't touch atlas.

It's on a hospital bed and it struggling to breath after having bipass surgery, atlas is going to rely on a much higher ore price to survive, maybe it will get it maybe it won't, it will never be in the same class as FMG, rio and BHP's Iron assets, it doesn't have the scale needed to thrive in a low ore price environment.

 

[notting]

FMG and atlas are worlds apart, I wouldn't touch atlas.

It's on a hospital bed and it struggling to breath after having bipass surgery, atlas is going to rely on a much higher ore price to survive, maybe it will get it maybe it won't, it will never be in the same class as FMG, rio and BHP's Iron assets, it doesn't have the scale needed to thrive in a low ore price environment.

Yep, but the sentiment will still take it back down. Although when I predicted RIO would hit 40 which must have seemed nuts at the time, in the back of my head I was thinking FMG would be around .60c (lucky I didn't voice that!). The market has voted FMG as better than RIO and BHP, even before this latest months run up, over the last year which is consistent with your analysis. Wasn't questioning your brain but this is running on sentiment, despite what ever fundamental position you take just like the rubbish - AGO, MGX, GRR, ARI, is what I'm sayen. Recoginising that is critical, cause it will turn, with the others when the turn comes.

So, when might the turn come?
Well This is a chart of the US transports which front ran the markets down. It has kicked back up to the critical/classical 61.8% ratracement level and what it does from here will determine what happens next!

 

[sinner]

I think it has just become clear that FMG is not a marginal producer, and can compete at the lower end cost of the field with rio and BHP, they aren't going bust they are earning good margins.

Come on VC, it's a pretty long stretch to make this claim, essentially you're saying it's a big coincidence that pure play iron ore miner FMG rose 25% on the day IO futs rose 20%.

I mean, we get it, you're a fan, but blind Freddy can see the technical beta is to the iron price. As notting pointed out, and regardless of whether you'd touch them, if this move was related to FMG specific fundamentals then other iron miners would not have made significant moves.

No time to be shorting in my opinion, the market will fluctuate offcourse, but man there are some super strong fundamentals at play here going against you in my humble opinion.

Shorts are looking at the iron price and borrow availability, not FMG fundamentals. I'm not short, was merely discussing the idea that Wys proposed of shorts getting wiped out into an NPC weekend.

 

[Value Collector]

Come on VC, it's a pretty long stretch to make this claim, essentially you're saying it's a big coincidence that pure play iron ore miner FMG rose 25% on the day IO futs rose 20%.

I mean, we get it, you're a fan, but blind Freddy can see the technical beta is to the iron price. As notting pointed out, and regardless of whether you'd touch them, if this move was related to FMG specific fundamentals then other iron miners would not have made significant moves.



Shorts are looking at the iron price and borrow availability, not FMG fundamentals. I'm not short, was merely discussing the idea that Wys proposed of shorts getting wiped out into an NPC weekend.

Offcourse the Iron ore price has a lot to do with the value of FMG, as I pointed out they make an extra $123,000,000 of so free cash flow for every $1 move up in the price of Ore, But FMG's share price is now higher than it was last time Iron Ore was at this level.

I am not saying there isn't a lot of speculation going on, I am just saying I think the market is slowly realising that FMG is a solid low cost miner that was priced as if it was an Atlas. Once All this shake out is through, this stock is going to be worth so much more.

 

[notting]

You can't get a short on it.
In other words everyone is!!

 

[dat111]

What is going on with Vale's MOU?

 

[Value Collector]

What is going on with Vale's MOU?

http://http://www.bloomberg.com/gadfly/articles/2016-03-08/father-ted-explains-the-vale-fortescue-iron-ore-venture

The MOU has a couple of points, partly its about the prospect of Vale making an investment in FMG assets by taking an ownership interest in some of its current or future projects and perhaps buying up to 15% of FMG on market.

But the main part I found interesting is the blending joint venture Idea, its basically going to mean both FMG and VALE can reduce their costs, and will allow FMG to mine longer into lower grades.

At the moment both FMG and Vale have a weakness that puts them at a slight disadvantage to BHP and RIO.

FMG's weakness is the grade of the ore, they are currently supplying 58% Iron content ore, but the industry standard is 62% so they get paid 10% - 15% less for their ore.

Vale's weakness is distance, it costs them $14.10 / tonne to ship their ore from brazil to china, compared to $3.50 for the Aussie miners, But they have the ability to supply ore that is higher in Iron content above the industry standard 62%, but they blend it in brazil and ship the diluted product.

The proposed concept is to have vale load their high grade ore on ships to make the $14.10 / tonne trip to china, where it then meets FMG's lower grade ore, blend them together to make the industry preferred 62% blend and then sell it.

By doing this they have access to more customers, it will reduce FMG's low grade pricing penalty (their product has just 6.4% less ore but they lose 10-15% on pricing, blending it to 62% should reduce that loss towards in price down to some where near the actual 6.4% rather than the penalty 10-15%) and increase the amount of ore available for mining and lower strip ratios (they can mine into lower cut off grades and hit low grade ore with lower strip ratios/over burden), and reduce VALE's shipping costs because more of the tonnes of Iron rather than Blended material.

 

[notting]

For some reason I'm finding this rather amusing.
What are they going to use to blend it? A giant Sunbeam on the docks?
Vale can't afford to buy anything at the moment, they have so much debt they will, as usual, depend on the Brazilian government to back them out of bankruptcy, the big deal, is 'Big deal'.:bs:
Perhaps they leaked it out yesterday that there was a tie up with Vale on the cards and insiders bet on a take over, a little disappointed today, we see.
The Chinese will probably introduce a $10 per ton blending tariff!

 

[Value Collector]

For some reason I'm finding this rather amusing.
What are they going to use to blend it? A giant Sunbeam on the docks?
Vale can't afford to buy anything at the moment, they have so much debt they will, as usual, depend on the Brazilian government to back them out of bankruptcy, the big deal, is 'Big deal'.:bs:
Perhaps they leaked it out yesterday that there was a tie up with Vale on the cards and insiders bet on a take over, a little disappointed today, we see.
The Chinese will probably introduce a $10 per ton blending tariff!

You can blend ore with the existing stackers and reclaimers, at the stock yard.

Picture an iron ore stock yard, as its unloaded off the ships you would have seen its "stacked" in long triangle shaped piles, and then later reclaimed by a rotating shovel, you can just lay one layer of ore over another and then the rotating shovel mixes it as it scoops it back up, blending isn't a new thing, all the iron ore miners do it already, and vale already does it before they ship to customers requesting 62%, it's a smart idea to ship only high grade at $14.10 / tonne from Brazil and then blend in China.

The customer gets the grade they prefer, vale doesn't have to pay to ship as must non iron material, and fortescue avoids the penalty and gets paid for the iron content they deliver.

 

[Value Collector]

Here is a a video of a reclaimer and stackers working in a stock yard,

[video]https://m.youtube.com/watch?v=LNc0i2PhoVc[/video]

 

[luutzu]

Here is a a video of a reclaimer and stackers working in a stock yard,

[video]https://m.youtube.com/watch?v=LNc0i2PhoVc[/video]

Saw a slide where they stacked these a while back, thought it was very clever. The video made it look awesome. Almost like watching Lucas' prequal Star Wars.

So you're back in black yet? [I'm on a similar ship so can crack that kind of joke right?]

 

[notting]

You can blend ore with the existing stackers and reclaimers, at the stock yard.
The customer gets the grade they prefer, vale doesn't have to pay to ship as must non iron material, and fortescue avoids the penalty and gets paid for the iron content they deliver.

Your really do know everything don't you?!

I was hoping I might get an Iron Ore Slurpee when I go to China.

 

[skc]

Vale can't afford to buy anything at the moment, they have so much debt they will, as usual, depend on the Brazilian government to back them out of bankruptcy, the big deal, is 'Big deal'.:bs:

Yes... I do find it funny that the market seems to so quickly forget that Vale isn't exactly a picture of health as recently as 2 weeks ago.

Also interesting... the FMG debt in the second market are now trading at some 5% premium to face value.

The market does have a short term memory.

You can blend ore with the existing stackers and reclaimers, at the stock yard.

Picture an iron ore stock yard, as its unloaded off the ships you would have seen its "stacked" in long triangle shaped piles, and then later reclaimed by a rotating shovel, you can just lay one layer of ore over another and then the rotating shovel mixes it as it scoops it back up, blending isn't a new thing, all the iron ore miners do it already, and vale already does it before they ship to customers requesting 62%, it's a smart idea to ship only high grade at $14.10 / tonne from Brazil and then blend in China.

The customer gets the grade they prefer, vale doesn't have to pay to ship as must non iron material, and fortescue avoids the penalty and gets paid for the iron content they deliver.

What would Vale do with its current low grade ore? Does this imply / hint that they will reduce production of low grade ore? I can see blending achieving an operational cost benefit... but without a change in the demand and/or supply dynamics, reduction in cost will quite likely flow straight to a reduction in price.