Fortescue shares continue slide

THE main lender to Fortescue Metals Group has extended its search for partners on a $US1.5 billion ($1.44 billion) loan until the end of the month as mining stocks failed to respond yesterday to a rebound in commodity prices.

By InvestSMART · 12 Sep 2012

By InvestSMART ·
12 Sep 2012

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Project delays and slowing Chinese economic growth battered business confidence.

The self-styled "new force in iron ore" held a teleconference last week to reassure lenders about the company's financial position after making dramatic spending cuts, but the Bank of America Merrill Lynch, the loan's underwriter, has yet to find willing parties to share in the spoils, Bloomberg reported.

Fortescue shares fell 18?, or 5 per cent, to close at $3.37.

Copper and aluminium traded near four-month highs, and spot iron ore prices rose 7 per cent from Friday to $US95 a tonne after the Chinese government announced plans last weekend to plough as much as Yuan1 trillion ($152 billion) through the economy via the construction of yet more airports, railroads, freeways and water treatment plants.

But analysts and commodity traders were unsure about the legitimacy of the plans and whether the rally in commodity prices could be sustained.

"This isn't new stimulus - the stockmarket shouldn't be overreacting to this sort of thing," said Yi Xianrong, an economist with the Chinese Academy of Social Sciences, a leading government think tank.

In a note to clients, UBS analysts warned investors not to take the proclamations of Beijing's all-powerful National Development and Reform Council at face value.

Pointing out that the council had merely published project approvals from recent months in reaction to weak economic data last month, a UBS analyst, Wang Tao, downgraded her forecasts for full-year gross domestic product from 8 per cent to 7.5 per cent. The Japanese bank Nomura and China International Capital Corp lowered their forecasts for Chinese GDP growth on Monday.

Industrial output in China fell to a three-year low last month, according to official data last week. On Monday customs reported a 2.6 per cent decline in imports last month.

Back at home, miners posted the biggest fall of any sector in National Australia Bank's latest business sentiment gauge, tumbling 14 points to a reading of minus 13 for last month, compared with a fall of five points to minus 2 in overall business confidence.

Murray Bailey, the chief executive of Yancoal Australia - controlled by the Chinese state-owned enterprise Yanzhou Coal - said the information he has suggested "there's probably a couple hundred million tonnes of surplus capacity in the steel industry in China that has yet to be wound down".

"Certainly [in] the metallurgical coal game and iron ore, there's several more months if not quarters of weakness remaining," he said.

Yesterday shares in BHP Billiton rose 0.4 per cent to $32.58 and Rio Tinto fell 0.3 per cent to $54.53.

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Frequently Asked Questions about this Article…

Why did Fortescue shares slide according to the article?

Fortescue shares fell after the company's main lender extended its search for partners on a US$1.5 billion loan until the end of the month. The loan underwriter, Bank of America Merrill Lynch, had not yet found willing parties, and investor confidence was hit by project delays and slowing Chinese economic growth. The article notes Fortescue made big spending cuts and held a teleconference to reassure lenders, but shares still dropped about 5% to close at $3.37.

What is the status of Fortescue's US$1.5 billion loan and who is handling it?

The loan search was extended to the end of the month as the main lender continued to look for partners to share a US$1.5 billion loan. Bank of America Merrill Lynch is the loan's underwriter, and Bloomberg reported the underwriter had not yet found willing parties to join the loan.

How did commodity prices move and did higher prices lift mining stocks?

Commodity prices showed a rebound—copper and aluminium traded near four-month highs and spot iron ore rose about 7% to US$95 a tonne. Despite that rally, mining stocks did not uniformly respond: Fortescue fell sharply while other miners had mixed moves, indicating the price rebound did not translate into broad recovery in mining shares.

What did the Chinese government announce and how did that affect iron ore prices?

China announced plans to channel up to Yuan 1 trillion (about US$152 billion) into the economy through construction projects such as airports, railroads, freeways and water treatment plants. That announcement helped push spot iron ore prices up roughly 7% to about US$95 a tonne, though analysts questioned how legitimate or sustainable the plans were.

What are analysts saying about the sustainability of China's stimulus and commodity rallies?

Analysts cited in the article were skeptical. Yi Xianrong of the Chinese Academy of Social Sciences said this wasn’t new stimulus and markets shouldn’t overreact. UBS warned investors not to take the National Development and Reform Council's proclamations at face value; UBS analyst Wang Tao cut her full-year GDP forecast from 8% to 7.5%. Nomura and China International Capital Corp also lowered their GDP forecasts.

What did Yancoal Australia's CEO say about surplus capacity in China and the outlook for coal and iron ore?

Murray Bailey, CEO of Yancoal Australia, said his information suggested 'probably a couple hundred million tonnes of surplus capacity' in China's steel industry that had yet to be wound down. He added that in metallurgical coal and iron ore there were 'several more months if not quarters of weakness' remaining.

How were major Australian miners performing in the market snapshot from the article?

The article reported mixed moves: BHP Billiton shares rose 0.4% to $32.58, while Rio Tinto shares fell 0.3% to $54.53. It also noted miners posted the biggest fall in National Australia Bank’s business sentiment gauge, which tumbled 14 points to a reading of minus 13.

What key factors should everyday investors watch in light of this mining-sector update?

Based on the article, everyday investors should watch developments around Fortescue's US$1.5 billion loan and any lender updates, commodity price trends (especially iron ore, copper and aluminium), Chinese economic data and official infrastructure plans, analyst GDP revisions from banks like UBS and Nomura, and domestic mining-sector sentiment indicators such as the NAB business sentiment gauge.