MARKETS SPECTATOR: Fortescue chill

Strong demand, a rising iron ore spot price, margins of as much as $US92 a tonne and a short list of buyers for the company’s Pilbara rail and port assets ... yet Fortescue shares can’t buy any love. The stock at 1300 AEST was down 20 cents, or 6 per cent, to $3.16 after falling as much as 7.7 per cent to $3.10.

Fortescue shares have dropped 35 per cent in the last 12 months compared with the S&P/ASX200 Index that have gained 15 per cent during the same period.

In the three months to June 30, Fortescue’s costs will be about $US38-$40 per wet metric tonne The company is receiving between $US110-$US130 per dry metric tonne. The spot price for iron ore imported through the northeast Chinese port of Tianjin rose a fifth consecutive day to $US120 a tonne. That iron ore spot price is up 8.2 per cent since June 13, according to Bloomberg data.

For investors the company’s net debt position, estimated at $US10 billion, is what is holding back the company’s stock. Although there are no financial maintenance covenants on Fortescue’s debt, restructured last year successfully by Credit Suisse and JPMorgan, investors are nevertheless worried about the amount of debt amid suspicions that the iron ore spot price will decline along with China’s economic growth.

Fortescue has attempted to allay concerns over its debt today by issuing a statement on the sale of its Pilbara rail and port assets. Credit Suisse values these assets at as much as $8 billion. Investors want a speedy sale of these assets so Fortescue’s debt can be slashed to a level that matches its cash on hand which may be as much as $2 billion by the end of the month.

The company won’t comment on the value of these assets. Some analysts have said Fortescue may only sell a stake of 40 or 50 per cent to infrastructure investors.

The company did say sales talks are advanced. “We are very pleased with the progress to date, having short listed potential investors and shortlisted potential investors” Fortescue chief executive Nev Power said in an ASX statement.

Until the sale of the Pilbara port and rail assets are finalised the stock may continue to suffer amid a general market malaise.