Do you believe company executives have a vested interest in seeing their company stock price go up? Or that they are the best people to ask about the company and the product the company deals in? After all, they’re surely in the best position to know.
Two weeks ago Jim Chanos confirmed that his hedge fund has short sold shares in Fortescue Metals Group [ASX: FMG]. His reasons for short selling the iron ore firm? He says a falling iron ore price could mean FMG won’t be able to repay their debts if its creditors come calling.
Chanos said (emphasis added is our own),
‘Increasingly, with any kind of reversion to the mean of iron ore prices to $US100 per tonne or less, we’re going to see a dramatically lower ability to service the debt and to service the capital programs they have. And a stock price materially lower than it is today.‘
Currently Fortescue has about $6 billion of debt. This is just over twice the company’s revenue. And Chanos seems sure that falling prices for iron ore – Fortescue’s bread and butter – will have a major impact on the company’s ability to service its debt.
Because of this, he’s not sure why anyone would want to buy Fortescue shares.
Yet Andrew Forest, chairman of Fortescue, doesn’t see it that way. He’s confident his company would still be profitable even if iron ore prices drop to $90-$100 per tonne.
So, with iron ore currently trading at $140 per tonne, is it possible it could fall below $100?
Iron Ore – Still Trades at $140 Per Tonne
Over the past two years the iron ore price has fallen more than 20% on two different occasions. Yet, it still hasn’t gone below three figures per tonne since November 2009.
But right now, it would only take a 30% fall in iron ore prices for the price to hit $100 per tonne.
Now, before you write off Chanos and his hedge fund as another American company with no understanding of the Australian market, read this:
‘They’re highly leveraged and exposed to the iron ore price. If we experience another downturn in the iron ore price like last year, you wouldn’t want to be caught long this stock.’
That’s from our very own Slipstream Trader editor Murray Dawes.
So if you are holding onto Fortescue stock… check out this chart first.
In March 2010 when iron ore prices dropped 26%…Fortescue’s stock price took a 31% hit.
And towards Christmas last year when the iron ore price hit the skids again…the miner’s share value went south by 33% over a couple of months.
A repeat of those falls could be on the way. Major Swiss bank UBS suggests ore prices will slide further, to $90 by 2016.
If that happens, Murray thinks it could be curtains for Fortescue and possibly other highly leveraged iron ore stocks. But Murray’s not just worried about iron ore stocks. For some time he’s told his Slipstream Trader members the entire Aussie market isn’t as healthy as some would have you believe.
To find out where Murray sees the Aussie market heading next, click here for more…
Shae Smith
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Fortescue Metals: Why This Stock Will Slump When Iron Ore Prices Fall
