Thursday, July 24, 2014

Seeking Alpha: Iron's Free Fall Has Rusted Fortescue Metals

My bullish calls on copper producers Hudbay Minerals (NYSE:HBM), Taseko (NTGB), and First Quantum (FQFLV) have definitely worked out, but the same cannot be said of Fortescue Metals (OTCQX:FSUGY) as a roughly 30% decline in benchmark iron ore prices and wider discounts have sapped the company's earnings and cash flow leverage.

I believe Fortescue can stay free cash flow positive at or above realized prices of $70/mt, but there's a major valuation difference between "survive" and "thrive" and the behavior of Chinese steel mills is not encouraging for the near term. While there are smaller Australian iron ore companies with even more leverage to an iron ore price recovery, Fortescue is a good way to play that basic thesis. I believe the market is factoring in a pretty bearish long-term outlook for iron prices, but this is a risky stock given its reliance on stronger prices.

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Iron's Free Fall Has Rusted Fortescue Metals

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