Analysts say Australian miner and railway operator Fortescue Metals Group could be worth even less than the $1.84 a share price it closed at overnight, with iron ore prices now tipped to dip as low as US$37 a tonne in the long term.
The share price for Fortescue, Australia’s third-biggest iron ore producer, has dropped by nearly 70% from its peak of roughly $6 in February last year.
But experts have suggested this week that the miner may still be overvalued, as the market for iron ore still hasn’t reached its new, low, long-term mark.
A bearish report from Citi this week delivered a long-term forecast for the iron ore price to be as low as US$37 a tonne.
Iron ore rose slightly to US$48.80 overnight, but has been below Fortescue’s reported break-even mark of around US$53 since March.
Fortescue chairman Andrew ‘Twiggy’ Forrest rejected claims last week that he should look to sell his 33% stake in the company, saying he was looking at the company’s long-term outlook, and would not be tricked into giving his stock away to ‘short-sellers’.
But with the lower iron ore price forecast, and repayments on Fortescue’s $11.9bn debt looming, Citi analysis would suggest that the long-term outlook for Fortescue might be worse than its current state.
“If FMG is not able to refinance the debt before mid-year, then the company would have to look at other options to fund repayment of the debt as at our iron ore price forecasts they will certainly not be able to do it from cashflow,” a Citi analyst said.
Citi experts predict iron ore to settle at an average of just US$37 a tonne through the second half of this year, and just US$40 a tonne through to 2018.
Federal treasurer Joe Hockey has been in the news this week with an even lower outlook, with plans to factor in an iron ore price as low as US$35 a tonne in the May 12 budget.
“There seems to be no floor,” Hockey reportedly told the Australian Financial Review. “We are contemplating as low as US$35 a tonne.”
700 jobs to go at Fortescue
Fortescue yesterday announced that after a “thorough organisational review” it would “bring work rosters across its operations into line with the standard rosters worked in the Pilbara industry.”
The miner plans to change its eight-days-on, six-days off roster for a more standard fourteen-days-on, seven-days off plan – a move which analysts say could allow Fortescue to cut its 4000-strong workforce by as many as 756 workers.
“This will further strengthen Fortescue’s position to withstand the market challenges now and into the future,” chief executive Nev Power said.
“We have already reduced our cost base significantly since 2012 through sustained productivity and efficiency improvements and today’s announcement will further bolster our resilience in an uncertain and volatile market.”
Fortescue said there would be opportunities for internal transfers for those affected by the roster move, with options to be explored to minimise impact on employees.
The miner plans to implement the new roster by June 30.
“While we would prefer not to have to change what has been a successful and differentiating roster for Fortescue, we are taking steps in response to the threat of oversupply in the market over the medium term,” Power said.
“While Fortescue took a disciplined decision to cut its capital expansion budget last year and defer additional capacity in our system, it is the threat of oversupply in the medium term by our competitors that is causing ongoing damage to our industry, all companies in it and to the state and national economies.
“In this environment, bringing our costs down rapidly and sustainably is critical and will place our company in the strongest possible position for the future,” he said.