THE DISTILLERY: Fortescue fever

Jotters take turns predicting the future for Fortescue, while Myer's lack of guidance draws ire.

Fortescue Metals Group talking banking covenants with its lenders is a serious matter. Founder Andrew ‘Twiggy’ Forrest might have enough of a case to put to lenders to go easy on the iron ore miner, but the next step will crucially shape the billionaire’s fate. Also in Friday’s shot from The Distillery, Myer’s decision to abandon guidance for the coming financial year reflects the vulnerability of retailers in uncertain domestic and international markets.

But first, Fairfax’s Adele Ferguson acknowledges Fortescue’s declaration it’s within banking covenants, which won’t be reviewed until the very end of 2012. What about next year?

"Asking a bank to waive even one covenant is a big deal and the market should be given much more information on why it is talking to its banks. It raises the question, what was in the heads of the board two weeks ago to agree to pay a dividend to shareholders; a week later announce staff cuts and the sale of assets and reconfirm liquidity wasn't an issue, then yesterday have media reports that they have asked the banks for a debt moratorium. Most of the key banks, including Commonwealth Bank, ANZ and JPMorgan have secured a position over the company's rail, locomotives and mining-processing facilities, but Merrill Lynch's $1.5 billion debt facility is unsecured and Fortescue is understood to have drawn down $750 million of that.”

Business Spectator’s Stephen Bartholomeusz draws a distinction between Forrest and coal entrepreneur Nathan Tinkler, who also appears to be experiencing debt-related problems. Forrest has created the world’s fourth largest seaborne iron ore producer that’s generating big-time cash.

"It is conceivable that his lenders will show some forbearance and give the group a temporary waiver to allow it to complete its expansion from 55 million tonnes to 115 million tonnes a year (it was originally envisaged that production would rise to 155 million tonnes) and start generating the extra cash the increased output will produce. With $8.5 billion of debt at balance date and a further $US1.5 billion raised subsequently Fortescue probably falls into the category of owing so much that it represents as much its bankers’ problem as its own. It is in no one’s interests for the banks to act precipitously or take any action that exacerbates Fortescue’s plight. The fact that Forrest and his chief executive, Nev Power, have acted with alacrity and decisively in response to the plunge in prices and also opened an immediate dialogue with the banks would encourage those bankers to support them. Forrest and Fortescue clearly aren’t in denial of their predicament, which can be an issue with entrepreneurs.”

What’s caught many onlookers off-guard is the volatility in Fortescue stock, with big swings up and down over the last few days. While hedge funds are undoubtedly playing a part, The Australian Financial Review’s Jamie Freed explains how Fortescue is turning into a "binary” bet for investors. If you’re bullish enough on iron ore to take the risk on Fortescue’s debt, you’re in. If not, you’re shorting or out altogether.

"What the market needs is to regain confidence in the management team that was shaken last week when it sacked some of the longest-serving employees and postponed the introduction of 40 million tonnes of new production that would have lowered its average costs significantly. The worry is that if the team can turn on a dime in reaction to market conditions on a $US9 billion project that had been in train for nearly two years, it could just as easily decide the timing is right to go to the market to raise equity.”

As all this played out, Fairfax’s Phillip Wen reports that Fortescue chief executive Nev Power was in Hong Kong, putting on a brave face to an to the CLSA investor conference.

Meanwhile, the other big corporate story from yesterday was the lack of guidance from department store Myer. Everyone who wrote on the retailer picked up on it.

The Australian’s John Durie suggests that chief executive Bernie Brookes could have chosen a better time to stop offering guidance than after an accounting adjustment got him within his last set.

"To be fair, Myer is not the only retailer not to give profit forecasts. Wesfarmers doesn't, neither does JB Hi-Fi and you can be sure Paul Zahra at David Jones will take the opportunity next week to join the non-disclosure bandwagon. Chief executives are damned for giving profit forecasts and damned for not, but at the very least it helps give the market some idea of how you are travelling. Once again most things within Brookes' control are OK – it's the external sentiment that stinks, as explained by the fact those people who actually make it into the store are spending more than they used to, it's just fewer people are making it to the store.”

Business Spectator’s Stephen Bartholomeusz takes readers back to the last time reaffirmed its guidance in May and focuses on domestic factors for an explanation.

"With significant uncertainty as to whether the general blip in retail spending around the end of the conventional financial year was an aberration caused by the Gillard government’s cash splash – the compensation to households for the introduction of the carbon tax – Myer has been careful not to provide guidance for this financial year. The breakdown between the group’s halves, however, does explain why Myer was so cautious when it reaffirmed its guidance after its third quarter sales report in May.”

Fairfax’s Malcolm Maiden picks up on the same point, but explains that it’s also global factors that are making it hard for Australian CEOs to offer shareholders guidance that’s even vaguely useful.

"Central banks and political leaders in Europe, the US and China will either head off a resumption of the global crisis that would begin with a meltdown of some kind in Europe, or they will not. The markets will either tank if the crisis flares, or they will grind upward as crisis is averted, and the tedious process of debt deleveraging in Europe and the US continues. Business and household consumers will either shelter from the storm or emerge from their bunkers early next year, blink in the daylight, and start spending more. The signs that Europe’s cot cases will be given the oxygen they need to repair themselves are growing as European Central Bank President Mario Draghi's ‘do what it takes’ plan takes shape, and the odds on a continuing ‘risk off’ market rally are improving. Decisions the US Federal Reserve announces this morning after its two-day meeting are the next markers on that road. Where it all goes is not yet entirely clear, however, and guidance from companies will be guarded until it is.”

The Australian’s Glenda Korporaal says there was some good news out of yesterday’s results for Myer. The fall in profit came in better than the market expected and comparable store sales showed positive signs.

In other corporate news, Fairfax’s Elizabeth Knight runs through the possible plays in front of Seven Group Holdings billionaire Kerry Stokes, now that the consumer watchdog has put a big hurdle between him and a larger stake in Consolidated Media Holdings.

The Australian Financial Review’s Chanticleer columnist Tony Boyd says Apple’s decision not to include a near-field-communications chip, which allows for contactless payments, in the iPhone 5 means the technology will be on a "slow burn”.

And in economic news, The Australian’s Adam Creighton explains how Queensland’s public sector job cuts are hardly the "savage” reductions that some newspapers are portraying them as.

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