Axiom Capital has launched coverage of Fortescue and bang!
Solid execution ramping capacity… but at the wrong time: We are initiating coverage of Fortescue Metals (FMG) with a SELL, High Risk rating, & A$0.89 12-month price objective. FMG, the worlds’ 4th- largest iron ore vendor, is a pure-play iron ore producer, with a focus, nearly entirely, on shipping iron ore into the seaborne market targeted for China (96.3% of ‘14 sales). Secondarily, the company has a diminutive focus on supplying iron ore to other countries (3.7% of ‘14 sales). The story here is actually quite simple, & predicated, we believe, on an iron ore price that was assumed to be above $70/mt for a “long time” (we are literally kicking ourselves for not initiating sooner).
…while RIO, BHP, & VALE recently reported cash costs of $18.7/mt, $25/mt, & $23/mt, respectively, FMG’s most recently reported cash cost was $46/mt. Against this backdrop, despite the undeniable fact that the seaborne iron ore market is currently in a state of structural oversupply (iron ore prices are down -45.6% over the last-12- months), as displayed in Figure 3 below, when looking at projected production from RIO + BHP + VALE + FMG, an incremental +95.2mmpa of iron ore supply is slated to enter the seaborne market (i.e., 8% of the total 1.2bmtpa ‘14 seaborne market); the lion’s share of this supply is just now ramping, with more expected throughout the year. This dynamic is balanced by a depressing demand outlook. What do we mean?
Well, due mainly to a slowdown in credit growth, & thus overall economic activity, we are projecting steel output in China, & thus iron ore demand, to contract in ‘15 for the first time since the 1980s (detailed in Figure 9 below) – China’s Total Social Financing, or credit, in Jan. ‘15 was down -21% YoY, & slowed to an annual growth rate of just +9.7% vs. +13.9% in ‘14A, underpinning a severe/concerning slowdown of credit growth. Thus, again referencing Figure 3 below, when considering RIO + BHP + VALE + FMG will produce enough iron ore in ‘15 to supply 89.1% of the entire ‘14 seaborne market, exacerbated by the fact that these 4 vendors alone boast an avg. cash cost of $28.2/mt, we lower our ‘15/’16 iron ore price forecast to $55/mt & $44/mt, respectively – by way of background, as shown in Figure 4 below, we remind our readers that ‘93-’07 iron ore prices avg.’d $37/mt (& avg.’d $28/mt ‘93-‘04).
Straight from the MB playbook that lot!
