From Mac Bank via the SMH blog:
- Our view on iron ore that promoted the initiation of our Fortescue position (gradual improvement in demand notwithstanding the new supply that was clearly in train) has been proven completely wrong. Hence we exit our small FMG position and also reduce our BHP position to underweight.
- While we acknowledge we are exiting and down-weighting when the share prices for both have already fallen substantially, we do not see the supply trends reversing near term thus there is no prospect of a major reversal in iron ore prices.
- For Fortescue this significantly changes the investment case given the stock’s leverage and the now mounting pressure to reduce gearing.
- For BHP any free cashflow improvement and capital return that was expected with the previously higher commodity prices (iron ore, coal and oil/gas) is increasingly likely only in the distant future.
FMG is old news even if more pain lies ahead. BHP and RIO increasingly look like levitating shorts.
