Can anyone actually attach the PDF of the report........ It wants me to log in...
Those price targets are absolutely outrageous..... Even if by year 4 they are at 100 MTPA, their forecast for Iron Ore prices must be like $300 per tonne for that kind of price target.... What are we all living in fairy land????
Oh, hold on, who's behind Eureka, Alan Kolher...... Enough said....
Cheers
no pdf but here's what it states:
PORTFOLIO POINT: Fortescue has proved the critics wrong by becoming an iron ore exporter, and that is just stage one of its plans.
It was only a little over a year ago that I first visited Fortescue Metal Group's (FMG) port and mine construction sites in Port Hedland and the Pilbara. Today I am again writing to you live from Port Hedland, but this time I can confirm Fortescue has moved from an "explorer" to an "exporter".
Yesterday, May 15, at 9.30am, I was part of a small group who witnessed Fortescue's first load of commercial iron ore being loaded on to a cape-sized Baosteel ship. Fortescue is no longer a concept, it is a reality.
It is difficult to comprehend what Fortescue has achieved in the 13 months since I was last up here. It is truly staggering to see the completed first stage of the project, particularly given that just 13 months ago there was still a huge amount of physical construction work to be done. Remember it was only 13 months ago that most people believed that "surface mining" wouldn't work and Fortescue would "never" be able to produce at anywhere near 55 million tonnes per annum (mtpa), if they were able to produce at all.
Thirteen months ago no mainstream investment banks covered the stock; now they all do. It is a tribute to the dynamism of this company that is just five years old that the first stage of this project could be completed on time and within budget. It is a tribute to the dynamism of this young company that they could beat a production target date that most people believed was "too aggressive".
Today's "first ore on ship" celebrations felt like one of those old "Swan Lager" advertisements. You remember the ones: They said you'd never make it, but you finally came through. For all of you who've made it, this Swan's made for you.
To see the Fortescue ship-loader loading Fortescue iron ore that has been delivered to the Fortescue port on Fortescue trains on to a Baosteel ship right opposite BHP's operations is just such a huge victory for an underdog. Make no mistake: Fortescue has been a massive underdog and that is what really attracted me to the story after that first visit. Today Fortescue is in an elite and exclusive club that call themselves "iron ore producers".
To see how far Fortescue has come in just over a year, I’ve attached that report from last year (see Fortescue: blue sky miner).
Where to from here?
To believe that Andrew Forrest and his team would be content as a 55 mtpa iron ore producer would be an error. Once they have proven "practical completion" of stage one by beating a series of production hurdles (to satisfy financiers) I suspect focus will then turn to stage two of the production ramp up.
In a recent note (see Fortescue has arrived) I explored the next leg of the Fortescue production growth, earnings growth, dividend growth, and in turn, share price growth story. I am going to revisit that work below
The debate about Fortescue is no longer whether it will work but what it will earn and what the market will pay for those earnings.
In my view this isn't about discounted cash flows or net present values. This about working out what the potential earnings per share is and then having a shot at what multiple the market will pay for those earnings. This is a simple P/E-based price target scenario analysis.
Before you say that's too basic, remember my very first buy recommendation on Fortescue (at $1.80 with a $5 12 month target) was based on the same methodology. My now somewhat famous "$100" long-term target (adjusted to $10 after the share spilt) was also based on having a shot at estimating earnings over the next five years. So far, that P/E-based price target approach has proved more accurate than any other valuation or price target setting approach. However, my rough "e" estimates have been too low because we underestimated iron ore price rises.
100mtpa by 2010
With the first ore on ship achieved ahead of schedule, the market will now look to the future and start speculating about 100 mtpa production. Let's do some really basic analysis here of what is a really basic business.
Let's assume in 2009-10 that Fortescue produces 100 million tonnes at an average margin of $50 a tonne (conservative). That's EBIT of $5 billion. Fortescue pays some corporate tax (30% conservative) and that leaves net profit after tax of about $3.5 billion. Fortescue has 2,802,393,400 shares on issue, of which an amazing 70% are owned by just five parties and the top 20 shareholders own 92%. Earnings per share works out $1.24 on that scenario and I think the market will pay an absolute minimum of 10 times for that earnings stream (globally unique stock in ultra-politically stable country). That generates a price target of $12.40 per share.
prawn_86 should read that, again would like to hear his comments
The more likely scenario is that the market pays 12 times for that earnings stream, which generates a price target of $14.88.
I'll be laughed out of town by sceptics for this analysis but I was also laughed out of town when I first speculated about Fortescue earnings-based share price targets 12 months ago. In reality, those initial estimates have proved very conservative.
Moving into a new higher trading range
As the market now comes around to focusing on Fortescue as a 100 mtpa producer, the stock – currently trading at about $9.20 –
will trade between $12.40 and $15. That also hasn't assumed Fortescue pays any dividends, which they are likely to do.
Over the next 12–18 months the stock will track up to the "100 mtpa" trading range of $12.40–15. I also suspect during that period the Chinese Government or Anglo American will come on to the register.
So even at just the interim production target of 100 mtpa I can see Fortescue's share price being almost double today's price over the next three years.
Iron ore is the highest economic rent business in all of resources. It is a scaleable logistics game with wonderful margins. Once you have the logistics in place you are in an elite club. Some of the members of that elite club have previously undercut other members of the club, which has led to a multi-decade mispricing of Australian product. BHP is ending that mispricing and Australian producers will be the beneficiaries. Australian producers will get the freight differential one way or another. I also believe iron ore "benchmark" prices will rise again next year.
While many investors will naturally think "I've missed the Fortescue boat", I believe that certainly isn't the case. You have missed the share price all but discount a 55 mtpa producer, but you are still buying a 100 mtpa, 200 mtpa or eventually a 300 mtpa producer very, very cheaply.
Fortescue remains a strong buy and is the great " pure play" winner in all of this. It has done such an admirable job against enormous odds and enormous scepticism. It is now a physical "producer" and from this point domestic investors who need to see cash flow, can buy the stock.
Fortescue is the biggest story in Australian resources and very few Australian institutions own it (yet). If you build it they will come. Today the first ship came and it was great to see it loaded live.
Charlie Aitken is a director of Southern Cross Equities, which is a paid adviser to Fortescue Metals Group.