Rohan C. Pease submits:
Big players are tossing around large stakes of Fortescue Metals Group (FSUMF.PK), the Aussie-based miner controlled by Mr. Forrest and the third largest iron ore producer in the land of Oz. Reports out of Australia today indicated that Phillip Falcone of Harbinger Capital in New York had unloaded a portion of his stake (now less than 5%, approximately half of his original position), Mr. Falcone has been one of Mr. Forrest’s longest supporters. Leucadia has joined the selling as well, unloading a stake they acquired in 2006. Many take this as a sign that FMG might dissapoint in the near term, however RBS upgraded the stock yesterday from "Hold" to "Buy" citing rising iron ore prices. RBS has a target of $5.80 adjusted for currency conversions. Which side is right, Hedge Funds or Institutions? Neither, I side with RBS. However, I believe their target price is way too low, my year end target is $8.00.
I wanted to update my pro forma income statement for Fortescue Metals Group to reflect increased iron ore prices and slower expansion growth for the company. Back in August, FMG was anticipating $6B of fresh financing from China, funds that were diverted from Rio Tinto (RTP) when they announced a joint venture with BHP Billiton (BHP). The terms were supposed to be disclosed as of the end of September, though the deal eventually fell through and FMG didn’t secure the financing. Originally I had put together a pro forma income statement for the rapidly expanding FMG, which had stated that it would like to see annual production exceed 100 Million tonnes starting around 2012. Obviously, the timeline has been extended as FMG now must fund expansion thru internal cashflow. Flipside is that they have good cashflows and with benchmark prices about to reset much higher (reports indicate 40% – 80%) this will provide a nice boost for infrastructure spending.