CLSA: Fortescue buggered

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From The Australian:

Under current assumptions, FMG will have a funding gap of about $2.5-$3 billion on of its required principal payments, so while debt will likely be rolled over, about 90% of cashflow between ’16-’25 will end up paying interest, and dividends will likely therefore be very modest, CLSA analyst Kaan Pekker says.

“In order to get on top of the debt burden a significant de-gearing event is required to the tune of about $3 billion,” he adds. “More broadly the iron ore markets are likely to remain under some pressure as new supply is bought on line pressuring price and margins.”

In his view, Fortescue is “ex-growth, highly geared and has limited capacity to increase the dividend (and) little capacity to create value beyond a rise in iron ore prices or significant debt repayments.”

FMG’s problem is obvious. Every time it cuts costs the iron ore price falls further because the miner is by definition lowering the cost curve. It’s not yet the marginal cost producer but it will be. It cannot escape its destiny! Thus even a “significant de-gearing event” won’t improve its returns, sadly.

Morgan Stanley also FMG today to Equalweight vs Overweight.

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About the author
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.