| 2006 | 2007 | ||||||
| Price: | 9.73 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 2,571 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
Sign up for free guest access to view investment idea with a 45 days delay.
SUMMARY
FMG is opening an iron ore mining in one of the top iron ore regions in the world (Pilbara – Australia) and close to Asian potential clients and nearby to BHP Billiton and Rio Tinto main iron ore operations. Based on a reasonable valuation, there is an upside of 43%. Leucadia National purchased 10% of the company in a PIPE transaction. The company owns the largest iron ore tenements in
BACKGROUND
Fortescue Metal Group Ltd. is the owner of iron ore tenement interests located in the Harmersley Province of Western Australia, an iron ore province covering some 80,000Km2 of the southern half of the Pilbara region. FMG ownership covers an area of 34,000 km2 (equivalent to 13,127 square miles), which includes the Cloud Break and Christmas Creek deposits. The company has
Nearby FMG’s sites are BHP and Rio Tinto main operations in the iron ore business, so FMG will be the third operator in the region. Pilbara and Carajás region (owned by CVRD) in
FMG’s operations will comprise an open pit mine,
The plan is to start the shiploading at end of January of 2008, and completion of commissioning and performance testing in the Mid-March of 2008.
The infrastructure capital cost of A$2.25 billion (or US$ 1.68 billion @ A$:US$ 0.75) includes a contingency of approximately A$ 270 million, but is not included working capital, interest during construction, or sunk costs.
By late March/2006 FMG has signed 25 provisional iron ore purchase agreements with Chinese steel companies representing a product off take of 36.4 Mtpa.
RESERVES (based on Snowden Consultants report – Appendix A)
High Grade (Fe 60.4%) 359 mt (proved 19.2%)
Low Grade (Fe 57.7%) 707 mt (proved 7.4%)
Total 1,066 mt (proved 121 mt)
Inferred Resources 466 mt
Total (P+P+Inferred) 1,522 million of tonnes
Based on Proven+Probable reserves it is possible to mine for more than 20 years. Additionally, due to the extensive tenements owned by FMG (equivalent to 7 seven times the size of the state of
CAPITALIZATION
The company obtained the resources for the project through high yield bond issues of US$ 2,05 billion in August 14, 2006, plus a PIPE transaction, which included a subordinated note of US$ 100 million and a rights offering of US$ 300 million for 10% of the company, both subscribed by Leucadia National (ticker: LUK).
- Senior Secured Floating Rate Notes due 2011 US$ 250 million
- Senior Secured Notes 10% due 2013 US$ 320 million
- Senior Secured Notes 9.75% due 2013 €$ 315 million (US$
- Senior Secured Notes 10.625% due 2016 US$ 1,080 million
- Subordinate Notes (4% on net sales) due 2019 US$ 100 million (Leucadia)
Sum US$ 2,151 million
Operating Lease US$ 115 million
Total Debt US$ 2,266 million
PIPE transaction US$ 300 million (Leucadia)
Resources available for the Project US$ 2,566 million
Leucadia National Transaction:
LUK paid US$ 300 million for 26,4 million shares that imply a price of US$ 10.36 per share and it is 50% above market prices. However when we deduct the present value of the excess interest that could be earned by the Note for 13 years, which is calculated as 4% on net sales, we got a price paid of US$ 100 million/26,4 million shares equal to $3.80/per share, that is approximately half of the current market price.
SHAREHOLDERS & MANAGEMENT
The company is controlled by three shareholders, as below:
The Metals Group Pty Ltd. (controlled by FMG’s CEO) 38, 7%
HMC Investors LLC (an
Leucadia National Corp. (ticker: LUK) 10, 0%
Sum 63, 2%
Leucadia’s president (Mr. Steinberg) is now a FMG’s director.
The management is well experienced in the iron ore mining sector, some of them have worked before for BHP and Rio Tinto in the iron ore business at Pilbara region. I would like to emphasize that Leucadia National had done before investments in the mining sector, so this is not new for them.
VALUATION
Estimative done by some sell side analysts regarding the potential value that can be fetched by CSN’s IPO of its iron ore assets (Casa de Pedra mine) plus logistics implies an EV/EBITDA multiple between 5 to 6x. However, operations in
We used the Base Case estimative available in the Offering Circular for the bonds issue, and the critical inputs,
Average Ebitda US$ 852 million
Multiple 6x
(-) Debt US$ 2,266 million
(=) EQUITY Value US$ 2,846 million
Nr of Shares: 267,12 million shares (including 2,8 million options in the money)
Value per Share $ 10,65 or AU$ 13,94 (@ US$1.00 = AU$ 1,3092)
This implies an upside of 43%; however I believe that as soon the project is implemented, the market will re-rate FMG and the upside may surpass what I have calculated. I am not given any value for the extensive tenements owned in one of the top iron ore regions in the world.
Another iron ore plus steel mill project that recently has done an IPO is MMX Mineracao e Metalicos
RISKS
- Execution risk which will be translated as cost overruns and other contingencies, that may require to raise additional capital on unfavorable basis (high dilution and/or high interest rates), however the company has put aside enough resources (US$ 470 million) to face this potential problem.
- Delays in delivering mining equipment, shortage of big tires.
- Delays in railroad construction due permitting schedules.
- Tender offer by another company at low prices that caps the upside potential due to starting the mine operation. This happened with Canico Resources (nickel mine) which was purchased by CVRD (ticker:
CATALYSTS
1) Undervalued asset in an oligopoly sector;
The global seaborne iron ore trade is tightly controlled by a few players: CVRD, the biggest; BHP Billiton and Rio Tinto, these are the big three, which have a market share above 70%, and they set the prices for the entire sector.
Second tier companies are comprised by Anglo American Plc. through its South African subsidiary (+/- 60% owned) Kumba Resources (ticker: KMB SJ); Cleveland Cliffs (USA) and its Australian subsidiary (+/- 65% owned) Portman Ltd. (ticker:PMM.AX), which produces around 8 Mtpa in
The key barrier to entry is logistics and an ore deposit big enough (long life) with good grade in order to support the cost of building a railway plus port facilities. Besides that, the political risk and environmental activism risks have to be low, due the long term nature of the mining business and very few countries has both at low level as Australia and Chile.
CSN Steel (ticker: SID) is expanding its Casa da Pedra iron ore mine from 16 Mtpa to 49 Mtpa (including pellets production) in order to take advantage of the high prices by selling to other steel mills outside Brazil, but part of this additional iron ore will be used by CSN which is doubling its steel production capacity. CSN is studying to list its iron ore assets through an IPO of 10-30% in order to signal the market about its value included in CSN’s shares, as also it will provide part of the funding for the steel mill expansion. CNS’ iron ore mine grade is slightly below to Fortescue grade. Casa de Pedra mine has Proven+Probable reserves of 351 mt with a grade of 60,4% Fe content. Besides that the 20-F informs that total resources are 4 billion tones of iron ore. I think that when this happens, we will have better comparable company for FMG, because it will be the closest peer company, same size, grade, and the distance from port is
2) Potential acquisition target
A few years ago Corus Steel (ticker: CS.L) tried to merge with CSN Steel (ticker: SID) in order to have access to high quality iron ore from Casa da Pedra mine and competitive slab costs. CSN is one of the few integrated steel operations in the world (mine, railway, port and energy); the only critical raw material purchased is metallurgical coal. CSN has operating margins of 33% and Ebitda margin of 43%, and the reasons for that are that it owns the sources of its main raw materials.
Other potential acquirers are Anglo-American Plc. which owns Kumba Resources (ticker: KMB SJ ), an iron ore mining company which operates in South Africa, and other big miners that may want exposure to the sector, such as: Xstrata (ticker: XTA.L). Also the big steel companies that would like to guaranty access to critical raw materials, such as: Arcelor-Mittal (which plans to have 50% of the iron ore consumption produced internally); Posco, Techint Group (Ternium Steel – ticker: TX), Chinese steel companies (e.g. Baosteel).
Someone may argue why I am not considering Fortescue acquisition by one of the big three, and my answer is that it will generate regulatory troubles with the anti-trust commissions. A few years ago CVRD (ticker: RIO) purchased Caemi, an iron ore mining company listed in Brazil, which also owned a Canadian iron ore operation called QCM. The European Anti-Trust commission forced CVRD to divest its stake in QCM, and due to other acquisitions in
| show sort by |
Are you sure you want to close this position Fortescue Metals Group Ltd.?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea Fortescue Metals Group Ltd. for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".