Given the growing signs of a downward trend in the iron ore price it is interesting to look at broker reports on Fortescue and Rio. Most vulnerable is Fortescue because of its gearing, but Merrill Lynch thinks it is a buy, with a price target of $6:
“FMG announced they have secured US$1.5bn in short term financing, consisting
of a US$750mn syndicated term loan and a US$750mn revolving credit facility.
The combined facility will expire on Dec 31 2013, and is expected to complement
the funding requirement for the remainder of FMG’s production growth plans to a
run-rate of155Mtpa by FY13-end. Details of the terms were not disclosed, but
based on comments by the company on the call, we estimate that terms were
likely more attractive than recent bond offerings.”
Interest coverage is highly senstive, however:
“Assuming both facilities are fully drawn and FMG will pay a relatively attractive
coupon on the borrowed funds (less than recent bond rates), we estimate FY13
EBITDA to Net Interest will dip to ~4.7x, well above the low of ~2.5x reported during
FY11.”
Comments on Rio are generally pretty bullish, which a cynic might suggest means it is time to sell. There is little hint of impending problems in the iron ore price. JP Morgan has a bullish price target of $84, arguing that its discount to net present value makes it compelling:
“RIO maintained 2012 capex guidance of US$16bn, with 2013 guidance sitting
around US$14bn prior to any additional project approvals. While sanctioned
projects remain on track, further large project approvals will depend on
market conditions. RIO also noted it will pause Pilbara iron ore production
at 353Mtpa (targeted end 1H15) to look at debottlenecking opportunities as
opposed to continuing on to 450Mtpa.”
Deutsche is basing its valuation on a market turnaround:
“The company is well positioned for a market turnaround in 2013,
with c.7% production growth (mainly from iron ore and copper) which could be
exceeded (the Pilbara expansion appears early), a strong balance sheet (20%
gearing), and low cost operations. The strategy is to invest in high returning
projects and phase expansions in-line with demand.”
But what if the market does not “turn around”? What we are probably witnessing is the uusal bias of analysts’ towards giving buy recommendations.
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