Tuesday, September 4, 2012

FMG and falling IRON ORE prices


US markets closed for Labour day last night.
Many miners are putting off projects due to falling commodity prices - the slow fall - is it cyclical or structural? 100bn of energy and mining projects put on hold - BHP and FMG making headlines for this.
Specifically for FMG we saw the following excerpt from WSJ:
  • Other people's money helped Australia's Fortescue Metals become the fourth-largest iron-ore miner in the world by output. But with iron-ore prices slumping fast, US$10 billion in debt and borrowing facilities is a worryingly heavy burden. Last week the price of ore fell below US$90 a tonne for the first time since late 2009.
  • At current prices, Fortescue cannot turn a profit, says brokerage CBA..With little or no net cash inflow on each ton of output , Fortescue is in a tight spot. The company wants to ramp up production by next summer to get ahead of a sharp increase in global iron-ore output set to start from 2014. But a year or more of iron ore prices around current levels would leave Fortescue needing as much as US$2 billion of external funding to pay for its expansion plans, a broker says. Options are limited. Tapping debt markets will be tough given low iron-ore prices and Fortescue's existing leverage. Moody's MCO +1.38%has put its junk rating on Fortescue's debt on review for downgrade, warning the miner is in danger of breaching debt covenants.
  • Management has also ruled out equity—issuing a substantial number of shares at the current deflated stock price would be significantly dilutive. Selling non-core assets could raise some funds . Analysts say a sale of the Solomon power station and assets such as air strips and accommodation facilities could raise several hundred million dollars. But that would still leave Fortescue significantly short of what's needed. Besides, buyers are unlikely to pay top dollar if they know the company is hard pressed to make a sale.
  • One major backer is Fortescue's founder Andrew Forrest. He bought nearly $40 million of the company's stock last week, bumping his stake to around 33%. That's a vote of confidence, though at $90 a ton for iron ore, the mathematics of Fortescue's business makes little sense. Mr. Forrest has pledged his support for Fortescue, but finding others to fund the company's increasingly dire needs won't be so easy.

Looking at the following bleak news, I remembered reading John Hempton's blog many weeks ago that actually foretoll FMG's precarious position should FMG see lower IRON ORE prices. Very good read check out the article. 
I'm very fortunate to have stuck with my risk management on this position, taking a small hit, which could've been a lot larger.