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Reward for the Fortescue faithful

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.

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.


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