One of Australia’s leading equities managers has said that Fortescue Metals Group equity is worth ‘zero’ under current iron ore prices.
Nikko Asset Management’s head of Australian equities Brad Potter said the country’s third biggest iron ore producer was facing a grim outlook with prices at $60 a tonne.
“My view of Fortescue is the equity is worth zero at current prices because of the huge debt burden they have. And it’s no wonder [Fortescue chief] Andrew [Forrest] is out there trying anything at the moment.
“At the end of the day he’s got poor quality assets, poor quality iron ore, high costs, and he’s got a massive debt. Recently he rose money in debt in the US market at around 10 per cent.”
While Mr Potter said the outlook for most iron ore producers was “dire”, he painted a very upbeat picture of the two biggest produces, BHP Billiton and Rio Tinto.
“BHP and Rio are actually making very good margins at current prices. BHP just commented that cash costs are going down to $15 a tonne. When you add royalties and transport, you’re sitting at $25 to $30 a tonne.
“So they’re making even margins of maybe 50 per cent on current prices. Rio is something similar. These margins are the best margins in any of their portfolio. There’s no other commodity in their portfolio that makes better margins than that.”
He said that with such impressive margins, BHP and Rio “should be spending all of their cap ex on iron ore”.
“Historically, the iron ore business for both those companies has been the best margin business in the long term. So even ignoring this demand shock we had from China over the last 10 years, long-term it’s had the best margins.”
Fortescue’s Andrew Forrest faced intense criticism earlier this year when he suggested iron ore miners collude to pull back on production in order to lift the price.
BHP Billiton and Rio Tinto rejected this suggestion. As the world’s cheapest iron ore producers they can remain profitable in a low price environment. By keeping production levels high, they are putting intense pressure on less efficient miners.
If this pressure continues, many miners will be forced to leave the market, meaning Rio and BHP will emerge from the supply glut in an even stronger position, ready for the next upturn.