MARKETS SPECTATOR: Fortescue jitters

The market is far from convinced by Fortescue's cost saving strategy, but it looks as though fears are confined to the one stock.

The market initially liked Fortescue Metals Group’s announcement this morning that it is deferring several projects, cutting jobs and in turn lowering its full-year production and capex guidance. Markets generally like it when companies take decisive action in dealing with volatile market conditions and future uncertainty, and this is exactly what Fortescue has done. However, after being up by as much as 3 per cent earlier it now appears traders are beginning to look through the news.

Targeted cost savings of $300 million per year as well as the capex reduction of $1.6 billion over 2013 will definitely help boost the company’s balance sheet and ease possible concerns over funding issues, but the market looks far from convinced.

In fact, judging by the market action elsewhere in the sector it looks as if traders are seeing it more as a stock specific story. The big diversifieds in Rio Tinto and BHP Billiton are both trading higher, possibly indicating that the two are in much better positions to weather the storm from a further deterioration in the iron ore operating environment. Rightly so, too, as their income streams are much more diversified and balance sheets stronger when compared to the highly leveraged Fortescue Metals Group.

At the end of the day, it was only last week that Fortescue chief executive Nev Power confirmed that the miner would be able to fully fund its expansion plans without the need to raise further capital. After initial positivity, the market now looks to be seeing his backflip as an admission of further deterioration in the iron ore operating environment.

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