MS is out with a bunch of iron ore stuff today including FMG:
Caught on the wrongside: We commenced the year with an UW rating based on our house view for iron ore prices to fall to US$31/t in 2H’CY16 and our concerns related to constrained cash flows in such an environment. Subsequently iron ore prices and FMG outperformed, and although our iron price forecasts have been upgraded (Exhibit 1&Exhibit 2), our 2HCY16 and CY17 estimates are ~20% below the current spot price (US$50/t). Early debt reduction has mitigated financial pressure, but we find the equity has outpaced revised valuation, we remain UW watching for the opportunity to upgrade.
Our price forecasts intermittently fall below debt repayment level: Although Fortescue can repay all its debt as it falls due on our Base Case commodity price forecasts, on a flat commodity and currency forecast, we find FMG requires an iron ore price of US$45/t (at AUDUSD of 0.74c) in order to repay all its debt as it falls due. Our Base Case forecasts for iron ore are below these levels in 2H’CY16 and CY17. These could be periods where the equity faces price pressure as its debt balance comes back into focus.
