more on Fortescue Metals

Here is an ongoing series of posts about Fortescue Metals (FMG.AX) and how it has traded at percentage extremes above it 200 week moving average. This helps tell you when chasing a stock higher becomes perilous in the face of a mean reversion, often when the tide and sentiment turns at its worst.

I don’t hate the stock nor the company. I’m just calling it as I see it.

For more than a year, FMG.AX has defied gravity.

If we see a break below $13.71, sees the stock visit $11.70 – $12.00, failing that it may test the $7.00 level.

Absurd perhaps but not impossible.

October 13, 2021

by Rob Zdravevski

rob@karriasset.com.au

#ironore #fmg

Iron Ore is cheaper than Firewood

A ton of Iron Ore is now 25% cheaper than a ton of Jarrah firewood.

With all my writing about extremes and mean reversion, Iron Ore is reaching an interim point which increases probability of a ‘buying’ moment.

Currently, it is trading at US$145 per ton.

The chart below circles an area between US$124 and $132 which I think (in conjunction with my other indicators) present an opportunity for a ‘trading buy’.

Incidentally, that upward sloping line is Iron Ore’s 100 week moving average.

So, I’m looking for a 14% drop in the coming 15 days to satisfy a buying criteria and this will have an effect of your listed iron ore sensitive equities.

BHP at $40.45 perhaps?

September 2, 2021

by Rob Zdravevski

rob@karriasset.com.au

More downside risk in FMG

At the moment, FMG’s stock price is testing an important support line. 
A pending bounce in price is NOT the main game. 
I’m expecting a path to $15 mark into a March-April 2022 timeframe 
to where the 200 week moving average will be at that time.

August 18, 2021
by Rob Zdravevski
rob@karriasset.com.au

cue

Adjusting for risk

During a client call yesterday, I was trying to give an example of what I thought was a ‘marginal trade’ and Fortescue Metals (FMG.AX) came to mind.

Coupled with my quick view of the iron ore supply and demand landscape, an iron ore price trading at the upper end of its historical range and a technical analysis snapshot, my opinion was that FMG either trades up or down $4, from its current price of $16.30.

Albeit a 25% return is enticing, an even money bet of perhaps losing 25% renders it a ‘marginal trade’.

To some extent, this can also be example where the investor needs to quantify or understand how much risk they are taking, compared to the return they are seeking.

Incidentally, in June 2020 I published an article (see link below) titled, “Iron Ore – As Good As It Gets”

https://www.linkedin.com/pulse/good-gets-iron-ore-rob-zdravevski/?trackingId=htg9tCIITS68I6Chxl80Zg%3D%3D

#riskadjusted

#fmg

October 28, 2020
by Rob Zdravevski
rob@karriasset.com.au

Is Fortescue in trouble?

Lately, Australian iron ore miner, Fortescue Metals (FMG), has seen increasing speculating whether it will breach loan covenants or require more capital due to the fall its stock pice has suffered as a result of the decline in the spot iron ore price.

Depending what index you happen to watch, iron ore has fallen 40%-50% in the past 6 weeks.

Keeping with this blog’s mantra, “Trying to Hear What Is Not Being Said – It doesn’t matter what the iron ore price does week-to-week. The multi-year and decade demand for iron ore is stronger than the supply pipeline, especially with the scarcity of capital and expanding project costs to extract and ship it.

Furthermore,  I don’t think that analysts fully take into account the iron ore reserves that FMG has. It seems they take the market capitalisation of $10 billion and look at its $8.5 billion of gross debt and start scaremongering. In fact, FMG has $2.3bn in cash, so it’s “net” debt is $6.2 billion.

Did you know that in the 2012 financial year, FMG had revenues of $6.7 billion and its EBITDA was$2.8bn? It’s net debt is less than 3 years worth of EBITDA, which is not a stretch considering its debt is priced at 600 basis points over the benchmark and is rated BB-.

FMG’s bonds aren’t trading at levels that indicate default or bankruptcy. I actually wish that they were trading at woefully large discounts as it would b a great investment opportunity. In fact, the upside for FMG’s debt is that their credit rating improves and their cost of borrowing drops and they subsequently re-finance.

I can’t say that FMG equity is dirt cheap but if you align yourself with its founder, owning the equity would be a more attractive than its “not quite cheap enough” debt.

Fortescue won’t fold or “go under”, irrespective of what ratings agencies have to say. In fact, Australia’s Labor government (who will most likely be re-elected in 2013) would be wise to stop bashing the iron ore miners and be prepared to shift their stance to being more supportive.

Imagine if Fortescue fails as a company? Directly and indirectly, FMG is responsible for (and has created) thousand of jobs. If government is bailing antiquated automobile manufacturers, it better get ready to support the iron ore industry.

Don’t they know that they would have a bunch of unhappy Chinese on their hands!

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