FMG - Fortescue Ltd

[syd1]

Thanx so much everyone for your response & explanations. I've read a lot of iron ore news lately, and interesting useful reads here

 

[divs4ever]

well in face to face deals with ( ethnic ) Chinese , i have found that making a fair deal ( win/win ) and STICKING to it , works fine.

i assume if you start changing things mid-contract , will bring out the haggling skills of such Chinese , in which case you might end up with a tilted outcome .

i guess we will paying the price of extra sophistication ( soon enough )

i do NOT expect the Chinese to shoot themselves in the leg during all the recent policy changes , although Australia MIGHT ( except for a few straight arrow companies)

 

[Smurf1976]

FMG isn't a company I know a huge amount about besides the obvious but one thing I'll say is this.

I never buy a stock without first having worked out what would cause me to sell it.

I mean precisely what would cause me to sell it?

I don't mean "if it falls a lot then I'll sell" but rather I mean "if it falls to $24.28 then I sell immediately", that sort of precise (random figure for example there, not an actual price I've applied to FMG).

Others will have different approaches but that's mine. I never buy without knowing precisely what would cause me to sell and I always follow that strictly. Just my

 

[divs4ever]

things that MIGHT cause me to sell FMG are

a management change i don't approve of ( for example someone like RIO doing a leveraged majority buy-in , that is RIO or someone else making all the decisions but playing with banker's and shareholder's cash )

a change in business direction , say give up mining and moving to aquaculture , or beef cattle

now if FMG dropped lower ( say $15 ) i would research WHY the share price dropped , if it was say more China tensions or just a dropping iron price i MIGHT be tempted to buy more , but NOT every reason for the drop would entice me to increase my holding

i NORMALLY see a price drop as a reason to ask myself is it a good time to buy a few more

PLEASE NOTE i rarely buy big parcels , i am happy to buy smaller ones and while buy extra if the price continues to drop ( unless there is a reason to look for the exit
( see examples at the top of the post )

 

[Value Collector]

FMG isn't a company I know a huge amount about besides the obvious but one thing I'll say is this.

I never buy a stock without first having worked out what would cause me to sell it.

I mean precisely what would cause me to sell it?

I don't mean "if it falls a lot then I'll sell" but rather I mean "if it falls to $24.28 then I sell immediately", that sort of precise (random figure for example there, not an actual price I've applied to FMG).

Others will have different approaches but that's mine. I never buy without knowing precisely what would cause me to sell and I always follow that strictly. Just my

I have a similar approach, but before I buy a large amount of stock I write my self a report on an A4 size piece of paper, outlining my valuation for the company, and why I am buying it.

Over time I can refer back to this valuation, and compar my thoughts with how things are playing out, and if things at a fundamental level are still aligning with my original investment thesis I continue to hold, and don’t let the market fluctuations sway me.

I consider selling a stock just because it has fallen by a certain amount, it’s always based on the underlying company performance.

 

[Value Collector]

I consider selling a stock just because it has fallen by a certain amount, it’s always based on the underlying company performance.

I meant to say, “I Never consider selling a stock just because it has fallen by a certain amount”

 

[tech/a]

I meant to say, “I Never consider selling a stock just because it has fallen by a certain amount”

But often falls in stock price
precede any fundamental reporting.
There is a very good fundamental reason for FMG to fall
30% off it’s highs right now

 

[Value Collector]

There is a very good fundamental reason for FMG to fall
30% off it’s highs right now

Not really, FMG has only fallen in price because the Iron Ore price dropped which has caused the speculators to panic, But the thing is FMG was never trading at a price that was based on $230 Iron Ore to begin with.

If FMG share price really did reflect the $230 Iron Ore price it would have meant FMG should be well over $60 per share, but it wasn’t it was only $26, because people already knew the $230 Iron Ore wouldn’t last, so never bid the stock up to $60.

$26 per share is easily justified by an Iron Ore price of only about $90, So there is no real need to panic as Iron Ore prices return back to more sustainable levels, because the share price never reflected those levels to begin with.

 

[Value Collector]

But often falls in stock price
precede any fundamental reporting.

And more often that, share prices fluctuate to levels not supported by any fundamental changes, In my opinion it’s better to ignore the noise and make the best decisions you can based on facts, no point in following the spoiled cattle off a cliff, I have made my way by doing the opposite to the spooked cattle, not following their lead.

If you know a company well enough, and know what fundamental things will affect it, you don’t need to wait for reports, for example FMG will announce their profits tomorrow, but it’s pretty easy to know that it will be a good report just based on publicly available information.

 

[divs4ever]

And more often that, share prices fluctuate to levels not supported by any fundamental changes, In my opinion it’s better to ignore the noise and make the best decisions you can based on facts, no point in following the spoiled cattle off a cliff, I have made my way by doing the opposite to the spooked cattle, not following their lead.

If you know a company well enough, and know what fundamental things will affect it, you don’t need to wait for reports, for example FMG will announce their profits tomorrow, but it’s pretty easy to know that it will be a good report just based on publicly available information.

i would be looking at the FMG outlook and guidance first , if thinking of trading /buying on the news

i would be AMAZED if the outlook/guidance was super positive .. i am looking for a cautious ( or no ) guidance

maybe i should throw a cheeky buy order in say $17.50 to $18 range , just in case the market is disappointed

but don't be fooled IF the order gets filled , i will still hold twice as many BHP shares ( so am NOT backing up the truck )

DYOR

( remember i am expecting FMG to hold some cash back to fund projects/acquisitions elsewhere , i do NOT expect a super juicy div. , this time around )

 

[tech/a]

Not really, FMG has only fallen in price because the Iron Ore price dropped which has caused the speculators to panic.

But the thing is FMG was never trading at a price that was based on $230 Iron Ore to begin with.

If FMG share price really did reflect the $230 Iron Ore price it would have meant FMG should be well over $60 per share, but it wasn’t it was only $26.

$26 per share is easily justified by an Iron Ore price of only about $90, So there is no real need to panic as Iron Ore prices return back to more sustainable levels, because the share price never reflected those levels to begin with.

How do you come to that projected Share price of $60 ?
Genuinely interested

 

[Value Collector]

How do you come to that projected Share price of $60 ?
Genuinely interested

There are quite a few metrics that point to that level, but the simplest one is the dividend yield.

If the Iron Ore price was to stay at $230 for ever, annual dividends would be over $5 per share fully franked.

Now, if a company was paying $5 per year in dividends $60 would represent an 8.3% return, which doesn’t seem an unreasonable and is higher than their peers currently get.

 

[tech/a]

But it’s not at $230 and not $27
at $160 you think it’s fair value at say around $40
so am I right that if Iron Ore stayed at $160 youd
expect FMG to rise to well over the current high?

 

[divs4ever]

i would expect Brazil to come back to full iron ore production sooner rather than later ,
the question is, will iron ore demand have risen at that time , decreasing the downward pressure on iron prices

 

[Value Collector]

But it’s not at $230 and not $27
at $160 you think it’s fair value at say around $40
so am I right that if Iron Ore stayed at $160 youd
expect FMG to rise to well over the current high?

What I am saying is that the market never priced in the $230 Iron Ore price to begin with, So it’s not a big deal for the Iron Ore price fall.

If Iron Ore was going to stay at $160, Yes you would expect a share price well over the current high of around $26, so $160 isn’t even priced in.

——————————

I actually don’t believe Iron Ore will stay above $100 forever, So we need to base our FMG valuation on a much lower Iron Ore Price, So let’s look back at 2020 financial year.

In 2020, the Iron Ore Price Averaged $93 and they paid $1.76 in dividends, If we believed that the Iron Ore price was going to Average $93 over the years (some years higher some years lower), then one way to value the company is based on how much we are prepared to pay for these 1.76 in dividends based on our personal required return.

I think most market participants would be very happy with a dividend return of some where around 8% especially given that the company is retaining 20% of earning which can be used to grow, and inflation should raise the Iron price given a natural hedge against inflation.

So if we want an 8% return, and the share is paying $1.76 fully franked ($2.51 including the franking credit), we can pay up to $31 and we will receive our 8% before tax return.

But, then it gets a little better than that, the share comes with a dividend pre loaded that’s due to go ex dividend in a couple of weeks, so it’s like you will get some of your purchase price refunded shortly after buying it, so you can pay a little more than $31, maybe $33 depending on the dividend announced tomorrow.

But, then it gets even better again, the Iron ore price isn’t at $93 yet, it’s 50% above that and has been for the first 2 months of this current half, you earnings are currently accruing at a rate that will mean dividends will be even higher than your 8% at the next announcement in March, so the share is probably worth even more than $33.

————————

All that being said, I think in its current state even paying a price of up to $28 a share should give you an above market return, at an Iron Ore price of around $90.

So, yeah when I see the Ore price drop from $230 to $150, I am not worried because it was never priced in, in fact I expect it to fall.

 

[over9k]

Calculating the correlation and beta between FMG and iron ore would be dead simple too (I can't be bothered on account of not holding the stock personally).

Then we get into the beta changing at different price points and... ugh. It gets really messy really quickly.

Probably good fun for the kind of person that likes that kind of thing, but I'm not it.

 

[tech/a]

What I am saying is that the market never priced in the $230 Iron Ore price to begin with, So it’s not a big deal for the Iron Ore price fall.

If Iron Ore was going to stay at $160, Yes you would expect a share price well over the current high of around $26, so $160 isn’t even priced in.

——————————

I actually don’t believe Iron Ore will stay above $100 forever, So we need to base our FMG valuation on a much lower Iron Ore Price, So let’s look back at 2020 financial year.

In 2020, the Iron Ore Price Averaged $93 and they paid $1.76 in dividends, If we believed that the Iron Ore price was going to Average $93 over the years (some years higher some years lower), then one way to value the company is based on how much we are prepared to pay for these 1.76 in dividends based on our personal required return.

I think most market participants would be very happy with a dividend return of some where around 8% especially given that the company is retaining 20% of earning which can be used to grow, and inflation should raise the Iron price given a natural hedge against inflation.

So if we want an 8% return, and the share is paying $1.76 fully franked ($2.51 including the franking credit), we can pay up to $31 and we will receive our 8% before tax return.

But, then it gets a little better than that, the share comes with a dividend pre loaded that’s due to go ex dividend in a couple of weeks, so it’s like you will get some of your purchase price refunded shortly after buying it, so you can pay a little more than $31, maybe $33 depending on the dividend announced tomorrow.

But, then it gets even better again, the Iron ore price isn’t at $93 yet, it’s 50% above that and has been for the first 2 months of this current half, you earnings are currently accruing at a rate that will mean dividends will be even higher than your 8% at the next announcement in March, so the share is probably worth even more than $33.

————————

All that being said, I think in its current state even paying a price of up to $28 a share should give you an above market return, at an Iron Ore price of around $90.

So, yeah when I see the Ore price drop from $230 to $150, I am not worried because it was never priced in, in fact I expect it to fall.

Thanks a very thorough explanation.
But this is where I struggle.
If I buy at $24 and lose 25% then get my 8%
Dividend —- how am I in front why should i
hold? Ok if I’m in profit - more than ok?

 

[Value Collector]

Thanks a very thorough explanation.
But this is where I struggle.
If I buy at $24 and lose 25% then get my 8%
Dividend —- how am I in front why should i
hold? Ok if I’m in profit - more than ok?

I am talking about buying it as a long term hold.

share prices will fluctuate, but if you buy into FMG and and you are earning 8%+ on your money, and you know that eventually the share price will correct to a higher more rational level, you can just ignore the temporary 25% drop.

——————

Also, at the moment the people that bought in recently are not going to be earning 8%, they will be earning more like 20% in dividends, their income won’t drop to 8% until the Iron Ore price returns to $93.

So yea their share prices will fluctuate, but their cashflow will be super sized for a while, and then eventually return to a lower but still great level, and the share price should be higher too.

 

[frugal.rock]

With dividend scalping being an easy trading strategy, there has been a few stocks lately that have had much greater than dividend falls just prior to record date.
I believe there's a lot of "novice" stimulus money in our markets at the moment.

Not saying this is going to happen, however, haven't all analysts from here to timbuktoo been predicting lower iron ore prices as we head towards the end of the year?
Haven't a clue how Brazil is travelling, but I know their not getting much beef exported either.

 

[frugal.rock]

My prediction, FMG will have a bumper day... just a gut feeling
lol