Fortescue asset sale up in air

The question must be asked - is Andrew Forrest feeling lucky?

The question must be asked - is Andrew Forrest feeling lucky? Does he feel like taking a punt that iron ore prices will remain above $US100 a tonne?

If he does, Fortescue could reverse (or at least stall again) the decision to sell a minority interest in its rail and port infrastructure business.

Forrest is prepared to take risks. It's one of the reasons he continues to be tagged an entrepreneur.

Fortescue originally intended to make a decision on selling part of The Pilbara Infrastructure (TPI) by the end of June but Forrest has extended this deadline by three months. The company said that the additional time was needed to sift through the various proposals of numerous buyers, but the more likely reason is the company wants to ascertain whether it can get away with retaining 100 per cent of this asset.

When the $3 billion sale was announced, the deal was considered a certainty. There are now analysts putting its likelihood of completion at less than 50 per cent.

At the very least the continued (relative) strength of the iron ore price reduces the need to raise cash through the part-sale of TPI. And, the less Fortescue's need to sell, the harder the bargain Forrest can drive if a deal does go ahead.

Traditionally the iron ore price has been at its weakest in the September quarter. But we are now a third of the way through this period and the price is holding up.

Fortescue is also receiving some welcome tailwinds from the softer Australian dollar, which has had a beneficial effect on its costs.

It has also managed to keep to its schedule to raise production.

All these elements bolster Fortescue's cash flow and help it in the race against time to pay down the group's debt burden through cash flow rather than asset sales.

As noted by JPMorgan's Lyndon Fagan, the company moves to ex-growth capex over the next 12 months. But other shareholders don't seem to have Forrest's appetite for risk. The share price has been under intense pressure since Fortescue announced the sale process had been moved back.

That is understandable given Fortescue could raise sufficient funds to place it in sufficiently safe territory to withstand a slump in the iron ore price to below $US100.

While there is little argument that Fortescue is overgeared in this uncertain environment, the company does not have any major debt repayments scheduled until late in the 2015 calendar year.

If Fortescue can tough it out, it bodes well for the longer-term valuation of the company. Forrest would certainly be averse to diluting his control over the its vital infrastructure.

Overlaid on considerations about the value and necessity of selling part of the port and railway operations is third-party access - on pricing for which smaller operators have already applied to regulators to adjudicate.

Fortescue would rather the regulators stay out of it and have the iron ore minnows deal directly with the company. (But, without any concrete access price, it is additionally difficult to put a value on these assets.)

The market is also in the dark about whether rail operator Aurizon will push ahead with plans to build a competing rail network in the Pilbara. There were reports on Monday that Aurizon's largest shareholder, the Children's Investment Fund Management, was against this investment given the uncertainties around the long-term iron ore price and the viability of some of the rail's customers in the event the iron ore price weakens.

Fortescue will on Tuesday provide the market with a quarterly production update, but that should hold no surprises.

Most investors will be watching for updates on TPI, but they may be disappointed. While there has been some recovery in Fortescue's share price from the lows earlier this month of about $3 to Monday's $3.68, an information vacuum on Tuesday could place it under renewed pressure. The share price has already fallen 20 per cent this year as concerns about China's growth rates have weighed heavily.

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