Fortescue's failings an opportunity for Vale

Fortescue cannot afford any delays to its debt reduction program. While a weaker currency and short term bump in iron ore prices will provide some relief for the company, it is vulnerable to attack from Vale.

Andrew Forrest should be cheering.

As a pure iron ore play, his Fortescue Metals Group should be a company running against the trend on global equities markets.

Iron is the only commodity that has seen price rises in the past week. It even edged higher last night to above $US120 a tonne as commodities, currencies and stocks took a hammering.

A recovery in the price of FMG’s sole product, turbocharged by a serious drop in the currency, ought to see investors flock to the company. But the rout in Fortescue shares, which began in February and has seen 40% wiped from the value of the company, shows no sign of abating.

Fortescue shares slumped 6% yesterday and are likely to come under pressure again this morning.

Once again, the company has made itself vulnerable by overpromising and under-delivery. A slight drop in production, following heavy rains in the Pilbara during the period, could be forgiven.

But the delays to its sale of its port and rail infrastructure are concerning. And yesterday’s admission provides ammunition to its Brazilian nemesis Vale.

Debt is Fortescue’s Achilles heel. The company essentially has boom time leverage during a period when iron ore prices are easing, a situation that was brought sharply into focus last year when spot iron ore prices dropped to almost $US90 a tonne.

Despite yesterday’s forecasts of a major cut to production costs and capital expenditure, there will be no respite for the pressure on Fortescue shares after yesterday admitting the sale of its infrastructure would not be completed in the current quarter, as previously promised.

The company’s $10 billion debt burden essentially boosts its real cost of production to between $US80 and $US85 a tonne.

To add to concerns, Brazilian giant Vale this week aimed its guns directly at Fortescue, highlighting its vulnerability.

The South American iron ore producer announced it would lift production to record levels in an attempt to win back market share by “squeezing high cost producers”.

That’s been interpreted as a declaration of war on Fortescue.

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