Short sellers target a vulnerable Fortescue

IT'S not clear if Andrew Forrest has sweaty palms just yet. But after a 5 per cent slump in his Fortescue Metals share price yesterday and a 4.5 per cent slump the day before, the short sellers targeting his company will no doubt be encouraged by the emerging mood against iron ore stocks as concerns about the Chinese economy grow.

IT'S not clear if Andrew Forrest has sweaty palms just yet. But after a 5 per cent slump in his Fortescue Metals share price yesterday and a 4.5 per cent slump the day before, the short sellers targeting his company will no doubt be encouraged by the emerging mood against iron ore stocks as concerns about the Chinese economy grow.

While Fortescue has outperformed the likes of BHP and Rio in recent weeks, it has not been immune to the heavy selloff in resource stocks. It is now trading at $4.84, down 20 per cent since late March. Last month, BusinessDay revealed renowned short seller Jim Chanos, who exposed Enron as a fraud and bet against Macquarie Bank's infrastructure model, had singled out Fortescue in a private investor briefing in early April as a prime short-selling opportunity.

The share price has been falling since. More than 100 million Fortescue shares, or about 3 per cent of the company, are registered as a short position. Mr Chanos called Fortescue a "value trap" because of its exposure to China and iron ore.

He argued that iron ore prices are trading well above their historical average of about $100 a tonne, noting that should they fall back to earth, Fortescue would struggle to pay down its debt.

Iron ore prices have been falling over the past few weeks from $US150 per tonne to about $US135.

Fortescue argues that it is lifting production to help pay down debt while commodity prices are still high.

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