Fortescue Metals Group (FSUMF.PK) announced on September 30 that a proposed $6 billion financing deal with Chinese investors had fallen through. That hasn’t helped the stock price.
I sold Fortescue Metalsout of my 12-18 month Jubak’s Picks portfolio on September 24 and the stock is down 11.3% from that sell as of 11 a.m. (ET) on October 1.  But the stock is still a member of my long-term The Jubak Picks 50 portfolio.
The news that the deal had fallen through wouldn’t have hurt the stock so much if Fortescue hadn’t trumpeted the package quite so loudly just a month ago. The deal, Fortescue said at the time, would provide critical financing in the company’s drive to hit an annual production rate of 95 million metric tons of iron ore, up from the current 50 million ton rate. The company needs about $3 billion for its next stage of expansion to build ports, ship loaders and a 260-kilometer railroad. Fortescue also has about $2.5 billion in debt.
In retrospect the financing wasn’t as secure as the company implied last month when it announced a package that combined iron ore sales to and financing from China. As part of the package, Fortescue agreed to supply China’s steel mills with iron ore at a 35% reduction in price from 2007-2008 levels. In annual negotiations dominant iron ore producers Vale (VALE), Rio Tinto (RTP), and BHP Billiton (BHP) agreed to a 33% reduction with Japanese and Korean steel makers. China’s steel makers have so far refused to sign onto that deal and have been fighting for a bigger cut, perhaps as much as 45%. The lower price from Fortescue was widely seen as strengthening China’s hand in these talks.
At the time Fortescue said that the supply deal was linked to the provision of $6 billion in financing and the company set a deadline of September 30 for getting the financial deal signed. That turned out to be harder than expected–either because the Chinese never agreed to link the supply and financing ends of the deal in the first place or because once they had the supply deal in place the Chinese decided to drag their feet in arranging the loans.
Now that the loan deal has fallen through, it’s not at all clear what will happen to the supply side of the package. Statements from Fortescue have been ambiguous: “Fortescue intends to continue working cooperatively with CISA [China Iron & Steel Association] including the provision of attractive iron ore pricing if requested.”
This news has drawn increased attention to a court case brought by the Australian Securities and Investments Commission against Fortescue and its founder and majority shareholder Andrew Forest. The regulators allege that Forrest and Fortescue mislead investors over announcements of deals with China Railway Engineering and China Metallurgical.
Things are certainly never dull on the new frontier in iron ore.
Jim … and others out there …
Any further thoughts or updates on Fortescue will be much appreciated. I like to follow Jim’s advice on buys and sells, but it did not seem like good timing in my case to sell my holdings when Jim suggested. However, it seems like a tricky time for the company and I really don’t have a clue whether it has much upside in the near future to warrant holding onto it for a bit longer.
Any solid advice or updates would be greatly appreciated!
Brazil won the bid to host Olympic for 2016. They will probably need to be on infrastructure construction frenzy, just like what Chinese did for 2008 Olympic. In addition, Brazil may want to top what China did for 2008 games. In this case, Vale seems to be one of the beneficiaries. What other companies should be put on the watch list for Brazil’s coming infrastructure boom?
From MineWeb Oct. 2nd
China determined to make its presence felt in iron ore talks
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=90165&sn=Detail
PRICE SEEN RISING (of Ore)
Mark Pervan, senior commodities analyst at Australia & New Zealand Bank, said he expected term iron ore prices to rise 15% in the 2010/2011 fiscal year, based on the prices agreed by Rio Tinto and Japanese steel mills several months ago.
“But if spot markets stay around these levels and China gets its calendar year wish, we could see a smaller rise, of maybe 10%,” he said.
The benchmark price of Indian origin ore with 63/63.5% iron in China has stabilised at around $90 per tonne, below the year’s peak of $115 hit in early August, but still above the contract price of around $75 cost and freight.
A survey of 5 analysts in banks and securities brokerages showed a range of a 10 to 15% rise for the fiscal year starting from April 2010.
“China’s economic expansion will sustain both steel production and steel prices, hence forming a floor for iron ore prices and leaving room for further upside,” said Hong Kong-based analyst Helen Lau of OSK Securities.
CISA has been setting out its position, saying it sees iron ore markets oversupplied next year as global steel output recovers slowly.
But China’s own steel output has been growing at a rapid clip. The country’s annual capacity is expected to top 700 million tonnes by the end of this year, with production of around 600 million tonnes of crude steel in 2009, hefty growth of 20% from the all-time high of 500 million tonnes in 2008.
Jim- Sorry about starting such a furor, but appreciate your response. Have been away, but am giving thought to your request for clarity and detail vis-à -vis my last post (Hope my comment made clear to you, at least, that my difficulty was format only, certainly not content!, and on that note I am examining whether it’s just me having difficulty getting used to the new format and the new market…)
Frankly, I think the chance of Forest changing is about 0%. He’s a big talking, big dreaming, big achieving, and sometimes big failing entrepreneur. Not clear that anyone else in Australia would have been audacious enough to belief they could build a new iron ore company big enough to challenge BHP. But increasingly clear that a less shoot-from-the-lip CEO would be better for the company.
My impression is that Forest has a bit of foot-in-mouth syndrome. He talks things up and is extremely optimistic. I love his outlook on life and the company, but it’s not good to continually over promise and under deliver.
Besides, it’s China, what else should we expect? They’re whipping poor little Fortescue around as a little pawn right now. The big boys haven’t been treated any better.
I think Forest will learn a little patients and to not disclose everything that doesn’t need to be.