According to Macquarie, further:
Strong FY16 results and prevailing iron-ore prices have prompted all three major credit rating agencies to upgrade their credit ratings and/or outlook for FMG.
Impact Positive credit rating momentum: Moody’s announced that it has upgraded its credit rating for FMG by one level, from Ba3 to Ba2, whilst retaining the company’s outlook at Stable. Following on from this announcement, both S&P and Fitch have reaffirmed their ratings for FMG (at BB and BB+, respectively) and lifted their outlook for the company from Negative to Stable. The positive rating momentum follows substantial upgrades to rating agencies’ iron-ore price forecasts, with both Moody’s and S&P now forecasting 2H CY16 prices at US$50/t, in line with our estimates.
FMG headed towards an investment grade rating: We were surprised by downgrades to FMG’s credit rating earlier this year, and the positive credit rating momentum is in line with our expectations given FMG’s compelling credit metrics on our estimates. Under both Moody’s and S&P’s price forecasts, we believe the majority of FMG’s credit metrics already trade in line with an investment-grade rating and, hence, believe it is likely that both rating agencies could upgrade FMG in the near to medium term.
Upgrade to investment grade could be a material catalyst: We note that an upgrade of FMG’s credit rating to investment grade status (i) opens up FMG to investment from shareholders restricted from investing in subinvestment-grade equities and (ii) offers FMG the opportunity to reliably refinance debt at cheaper interest rates than existing debt. We estimate that an upgrade to investment-grade status (and associated 2% lower borrowing costs) could potentially lower FMG’s all-in breakeven price (unadjusted, Macquarie calculation) by ~US$0.78/wmt (~3%) and increase underlying earnings and free cash flow by 12% and 13%, respectively, in FY18. Earnings and target price revision
Minor changes to our forecasts increases our FY19–FY20E EPS by <1%. Price catalyst
12-month price target: A$5.40 based on a 50/50 NPV and 6.0x EV/Ebitda methodology. Catalyst: FMG will host its annual investor day and site tour on 1–3 November. Action and recommendation
Maintain Outperform: We were surprised by downgrades to FMG’s credit rating earlier this year. On our base-case forecasts an upgrade of FMG’s credit rating to investment grade appears inevitable, which should offer price support and also help the company lower break-even costs. With spot iron-ore prices of ~US$59/t still comfortably trading ~13% above our ~US$52/t 1Q FY17 forecast, we note that our flexed valuation for FMG still offers significant upside potential under spot scenarios.
Well, yeh, but where will spot be in two months? For those looking to get on board the FMG train, the seasonal destock is a better chance, surely, than now. I can’t see FMG rallying as the iron ore price falls to the mid, low $40s.
The trade then will be on another round of credit juicing in China. But Xi Jinping has made that look less likely in the past week or so even if it remains a decent chance.
It will all depend upon the pace of slowing in Chinese property which, at the moment, looks to be slow enough for China to mull no new big bang spending.
The percentage play as of this moment is to be either taking profits or getting short for seasonal weakness.
