Morning Report Thursday 6 August 2015
Yesterday, Fortescue Metals (FMG), one of our trading positions, rallied over 6% on rumours of asset sales to the Chinese. At one stage the shares were up over 10%, prior to FMG informing the market it was “open to discussions to commercial discussions but no agreement has been made at this time”. FMG has been a brilliantly run business over recent years, slashing its costs, hence giving confidence to any suitor that they will survive as Iron Ore plunges, down around 70% in around 5 years – see chart 2.
• Impressively FMG have reduced their breakeven point to ~US40/tonne compared to around $US60/tonne in late 2014.
With FMG due to report on the 20th August, ongoing volatility in the share price is very likely, with short sellers understandably getting nervous that their paper profits may vanish very quickly (see below for explanation). This morning, Bloomberg has reported “rumours” that both Hebei Iron & Steel Group Co. and Tewoo Group Co. have approached FMG around buying a stake in their infrastructure assets. Two state owned suitors must be good for FMG. Any sale would enable FMG to reduce its debt levels that have concerned the markets in one swipe. At MarketMatters, we believe the ducks are continuing to align for a strong rally in FMG, well over $2.
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