Bears put Fortescue's mettle to the test

IT IS not clear if Andrew Forrest has sweaty palms just yet.

IT IS not clear if Andrew Forrest has sweaty palms just yet.

But after a 5 per cent slump in his Fortescue Metals share price yesterday and a 4.5 per cent slump the day before, the short sellers targeting his company will no doubt be encouraged by the emerging mood against iron ore stocks as concerns about the Chinese economy grow.

While Fortescue has outperformed the likes of BHP Billiton and Rio Tinto in recent weeks, it has not been immune to the heavy selloff in resource stocks.

It is now trading at $4.84, down 20 per cent since late March.

Last month, BusinessDay revealed that the short seller Jim Chanos, who exposed Enron as a fraud and famously bet against Macquarie Bank's infrastructure model, had singled out Fortescue in a private investor briefing as a prime short-selling opportunity.

The share price has been falling since. More than 100 million Fortescue shares, or about 3 per cent of the company, are registered as a short position.

Mr Chanos called Fortescue a "value trap" because of its exposure to China and iron ore.

He argued that iron ore prices were trading well above their historical average of about $100 a tonne, noting that should they fall back to earth, Fortescue would struggle to pay down its debt.

Iron ore prices have been falling over the past few weeks, from $US150 a tonne to about $135.

Fortescue argues that it is aggressively increasing production to help pay down debt while commodity prices are still high.

Short sellers make money selling borrowed stock and then buying it back at a lower price later before returning the stock to the owner and pocketing the difference.

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