FMG’s share price has fallen 48% since we moved to a Sell rating on November 6, 2013 (vs. ASX 200 +1.5%) impacted by a combination of falling iron ore prices, grade discount and the optics around customer prepayments.
Iron ore is currently at US$75/t and we believe it could trade lower into 2015. Pre cost-cutting initiatives, we see FMG with a breakeven price of US$71/t. Whilst FMG has a large debt position (net debt US$7.4 bn) and despite low iron ore prices, we do not see any capital risk with the company as its first maturity is not until 2017 and the company can (and we believe most likely will) refinance the bond.
Current view
The recent fall in the iron ore price has put pressure on FMG’s cash flow. We estimate the company is making around US$5/t of cashflow on current numbers. The compression in cashflow has been sharp and has had elements of the market question FMG’s capital structure. However our analysis indicates that FMG will be able to extend maturities in its capital structure, including its next maturity of the 6% bonds in 2017, and as such we do not see risk of a capital event. With the key planks of our previous negative view now largely priced in, we upgrade FMG to Neutral.
Fair enough. I just don’t think it matters. With much of its production the swing surplus in seaborne markets in the next few years, prices have to fall to where it can’t make money or it must get its costs below someone else’s and drive them out.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
