In Commodity News 29/06/2016
Fortescue Metals (FMG.Australia) has soared 81% this year as iron ore prices recover and the Australian miner cleans up its balance sheet and speeds up debt repayments.
Morgan Stanley, which just raised its iron ore price forecast substantially, thinks investors have gone ahead of reality.
First, for Fortescue to repay all its debt as it falls due, i.e., not rolling over old debt and issuing new ones, iron ore prices have to be at least $45 per ton (assuming the Aussie is worth 74 cents per U.S. dollar). Ore with 62% content closed at $53.86 a dry ton on Monday. Morgan Stanley thinks ore will average $45 in the third and $35 in the fourth quarter this year. Therefore, “these could be periods where the equity faces price pressure as its debt balance comes back into focus,” wrote Brendan Fitzpatrick. We are looking at the fourth quarter.
Second, at the current iron ore price, Fortescue Metals is worth only $2.45. This stock is trading at 3.38 Australian dollars, or about $2.50. “This highlights the market’s expectations of continued improvement in the iron ore price (and/or a lower AUDUSD); or alternate value generation,” noted the bank.
Fortescue Metals pared back 4.3% today after soaring 8% yesterday as China Dalian iron ore futures rallied. Iron ore futures traded in Dalian were up another 3.9% today as China’s two large steel makers are in merger talks, showing that the government is serious about cutting metals overcapacity.
Source: Barron’s
