FMG's heavy hitters step up to the plate

Countryman

I like it when management has skin in the game, and no-one can accuse Fortescue Metals Group (FMG) management of not practising what it preaches.

It's been well documented that Andrew Forrest recently bankrolled the purchase of close to $100 million worth of FMG shares earmarked for company executives.

Recently appointed Fortescue chief executive Neville Power followed this example by purchasing $560,000 worth of FMG shares on-market through his super fund and a trust company last week.

These moves came as FMG continued to be sold down, from a yearly high of $7.34 in January to close at $4.09 on Monday.

From a charting perspective, this was a break in FMG's long-term uptrend as pressure builds on commodity prices.

FMG is a high-risk proposition being a single commodity producer, and highly leveraged to a single client with China accounting for more than 50 per cent of the world's iron ore demand.

This risk has been priced into stock at these levels, with the forward price-to-earnings ratio of FMG being 5.9 for FY12, compared with BHP, which was trading at a forward P/E of 7.3, RIO at 6.4 and the ASX 200 Index at 10.4.

On Friday, FMG moved to reassure the market that its September quarter production was on schedule, shipping more than 12 million tones, a company record.

Despite the rumours to the contrary, FMG continues to sell all of its production with no cancellation or deferral of cargoes at an average price of $160 a tonne.

FMG has a full book of expansion plans going forward as it duplicates its rail line, expands the port and progresses with the development of the Solomon hub.

It has about $US2 billion cash on hand and a net debt of $US2.2 billion, with the company planning to raise this up to another $US1.5 billion in debt by the end of the year to fund the expansion projects.

Funding options for FMG include another corporate bond issue in the US, or borrowing from a Chinese bank, with the cash required in time for the peak of construction in the March quarter of 2012.

FMG hasn't been the only company in the iron ore sector making news over the last week, with BHP reassuring investors of its long-term confidence in iron ore demand during an analysts' tour of BHP's Pilbara operations, the first since October 2008.

According to BHP iron ore president Ian Ashby, China's robust steel demand will allow iron ore miners to overcome potentially crushing labour, capital and infrastructure costs.

Mr Ashby added that BHP expected China's economic growth rate to fall to between 7 and 8 per cent per year, down from the 8 to 9 per cent now being experienced.

BHP has a $US7.4 billion expansion planned for the company's Port Hedland facilities to reduce bottlenecks through this part of the production process.

·For more information, contact Cameron Bartram at Sentinel Stockbroking on 9225 0028 or email cbartram@sentinelgroup.com.au

_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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