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.
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.
