For the past couple of weeks Andrew Forrest's Fortescue Metals has been popular among traders, not because its share price was going up but owing to its popularity as a stock that can be short sold. In other words, professional punters were betting on it going down.
Fortescue has long been a volatile stock. In the early days it was a bet on whether the company would be able to build its infrastructure and develop a mine.
But later the bets were on how Fortescue would fund expansions and new developments.
The latest stock price tremor, which the short sellers seized on, was in relation to the last piece of the funding jigsaw puzzle.
Fortescue had already indicated it would access US debt markets for the remaining $US1 billion ($955 million) it needed to complete its production but the rumour mill ran hard that the company couldn't seal the deal.
The punters were wrong. On Tuesday in the US the company raised $US1.5 billion in senior unsecured notes after the debt issue was three times oversubscribed.
The company is on track and on budget to lift annual output to 155 million tonnes by June 2013. The share price ended up slightly at the close yesterday.
With this hurdle behind it, Fortescue's fortunes, like those of all other iron ore producers, rest on the price of the product. Given the growing shift to shorter-term and spot pricing of iron ore in China, tracking this can be a wild ride.
Over the past six weeks, iron ore prices have fallen 20 per cent and, over the past 48 hours, have taken a major tumble. The falls are testing the mettle of investors who are sticking to the prognosis the medium-term outlook for prices remains solid.
Rio Tinto blames the slump on the decision by the world's largest producer, Vale, to divert shipments of iron ore from Europe to China.
Others including Fortescue predict the pressure on prices will ease as Chinese stockpiles clear by the end of the year.
Fortescue's chief executive, Nev Power, said yesterday that, despite the fact the Chinese were running down inventories, the company was still selling all its product.
Optimism about the price of iron ore and other commodities is predicated on averting a major global economic slump.
A couple of weeks back, Power said the company was not deterred by short-term softening in the iron ore price, adding most appeared to be a carry-over from the uncertainty in Europe.
BlackRock, which manages the Global Mining Investments Ltd portfolio out of Britain, has had a team in Australia this week presenting their views on the sector, which they say has been oversold by the market.
BlackRock reckons many mining companies are trading at levels akin to those at the worst of the financial crisis. The fund has been snapping up unloved resources stocks, including Fortescue.
GMI investments manager Evy Hambro does not dispute the sovereign debt crisis in Europe will have a major fallout but equally the firm is not factoring in a disaster scenario.
Fortescue got its issue away at 8.25 per cent, suggesting debt markets remain relaxed about its ability to service obligations.
But this calm is not being reflected in equity markets. The Fortescue share price has fallen from $6.50 in August to $4.62 yesterday. During that time it has traded even lower.
The Fortescue strategy is to develop as much product as possible while the price remains relatively high in historic terms.
Whether the company needs to go back to debt markets depends on whether, when it reaches 155 million tonnes a year, it will take a breather.
History suggests Forrest won't stop if he takes the view recent events are a blip in the charts for growth and demand for raw materials to feed China's vast steel mills.
In recent times Fortescue has not strayed far from the script it has provided to investors around production and costs.
Most major analysts have price targets on the stock well beyond its present trading levels.
Frequently Asked Questions about this Article…
Why were traders short selling Fortescue and how did that affect the Fortescue share price?
Traders were short selling Fortescue because the stock is volatile and there were rumours that the company might struggle to secure the final piece of funding for its production expansion. Short sellers bet on the share price falling, which added downward pressure on the stock. However, those bets proved premature after Fortescue successfully completed a US debt raise.
Did Fortescue secure the funding it needed to complete its production expansion?
Yes. Fortescue accessed US debt markets and raised US$1.5 billion in senior unsecured notes. The issue was three times oversubscribed, indicating strong demand from debt investors and resolving the funding question that had been worrying some market participants.
What does Fortescue’s US$1.5 billion debt issue priced at 8.25% mean for investors?
Raising US$1.5 billion in senior unsecured notes — at an 8.25% price in this case — suggests debt markets were relatively comfortable with Fortescue’s ability to service its obligations. For investors, it means a major funding hurdle was removed, though equity-market sentiment can still diverge from debt-market calm.
What is Fortescue’s production target and timeline for its expansion?
Fortescue is on track and on budget to lift annual output to 155 million tonnes by June 2013, according to the company’s guidance in the article.
How do swings in iron ore prices affect Fortescue investors?
Fortescue’s profits and equity performance depend heavily on iron ore prices. The article notes iron ore moved to shorter-term and spot pricing in China, making prices more volatile — for example, a 20% fall over six weeks and a bigger tumble in 48 hours. That kind of volatility can make Fortescue shares a wild ride for investors.
Why did iron ore prices slump recently and what are company views on recovery?
Rio Tinto attributed the recent slump to Vale diverting shipments from Europe to China, increasing supply into Chinese markets. Fortescue and others expect pressure on prices to ease as Chinese stockpiles clear by the end of the year, and Fortescue’s CEO Nev Power said the company was still selling all its product despite inventory adjustments in China.
What do big investors like BlackRock say about Fortescue and the mining sector?
BlackRock’s Global Mining Investments team thinks the mining sector has been oversold and that many mining companies are trading at levels similar to the worst of the financial crisis. The fund has been buying unloved resource stocks, including Fortescue. GMI manager Evy Hambro acknowledged European sovereign debt risks but isn’t assuming a worst‑case global economic disaster.
Should everyday investors be worried about the decline in Fortescue’s share price?
The article notes equity markets have been nervous — Fortescue’s share price fell from about $6.50 in August to $4.62 at the time of the report — even though the company cleared its funding hurdle and remains on track with production. Investors should understand this tension: debt markets were comfortable with Fortescue’s financing, but commodity price volatility and equity sentiment can still push the stock lower. The company’s stated strategy is to keep developing product while prices remain relatively high, and most major analysts still have price targets above current trading levels.
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