Credit Suisse runs some interesting modelling on the major ore miners today and concludes:
Flat pricing at $80/t sees Rio/BHP/FMG DCFs at A$65/35/5/sh and all three companies could continue to reduce debt levels. $70/t means – Rio/BHP/FMG DCFs at A$52/31/1.4/sh.
Fair enough, I guess. But, as readers will know, using discounted cash flow (DCF) to determine fair value has its problems. Such modelling is very vulnerable to your input assumptions and, moreover, says absolutely nothing about market pricing.
Even a quick look at the FMG share price, which has traded between $3 and $7 for several years, shows you that markets don’t give a hoot about FMG’s DCF.
In the case of Credit Suisse modelling, an $80 iron ore price may deliver a $5 valuation but it doesn’t pass the laugh test vis market pricing. At $70, CS claims FMG still makes money (I don’t know how!) but at $1.40 DCF it’s trading on a ludicrous price earnings ratio before you get to market pricing.
FMG will probably never go out of business but it’s not because it’s worth a whole lot. What will happen is it will get cheap enough that either Rio or, more likely, BHP will buy it, and shut it’s higher cost mines to balance the iron ore market. That is if they’re prepared to out-bid the Chinese who will want to see it run forever.
In the end the fate of FMG will be determined in Canberra.
