FMG combats Morgan Stanley sell note with $500m buyback as Wall St slump makes good news rare
11th October 2018
The sharp increase in US interest rates, coupled with trade war fears, triggered a whiff of panic in financial markets this week, but through the smoke some cool heads saw buying opportunities, led in Australia by iron ore entrepreneur, Andrew Forrest.
While not directly buying more shares in Fortescue Metals Group, the company he chairs and controls with a 30% stake, Forrest is already a big beneficiary of a proposed $500 million FMG share buy-back.
Within minutes of the buy-back announcement FMG’s share price rose by 18c (or 5%) to $3.76, a move which clawed back some recently lost ground and which added an extra $150 million to the paper-value of Forrest’s FMG stake, assuming he doesn’t participate in the buy-back.
The rise in FMG’s share price means the buyback announcement has achieved one of its objectives, to put a floor under the company’s stock, which has sunk by 31% from its January peak of $5.35, with the fall largely a result of its lower-grade iron ore being sold at a discount.
Whether Forrest accepts the buy-back offer for some of his shares is largely irrelevant for a man with a fortune valued at around $4 billion.
The more important signal for FMG investors, and the wider stock market, is that he believes FMG has the spare cash to flip from debt reduction to increased shareholder rewards and that buying FMG shares now is a good investment.
But there could be another factor at work in the share-price boosting buy-back and that’s annoyance with a critical analysis of Fortescue two weeks ago by the influential US investment bank, Morgan Stanley.
The bank’s FMG report was unusual for two reasons. It was an “initiation” analysis from Morgan Stanley, which has not previously researched the stock, and it came with a sell recommendation, which is odd advice on a previously unresearched company – a way of saying “why bother” to clients who probably don’t own the stock anyway.
Under the headline “Between steel and a hard place. Initiating at underweight” the bank’s report was written at a time when FMG was trading at $3.95 whereas Morgan Stanley saw a price target of $3.30, which will be a two-year low if it drops that far.
Morgan Stanley’s case for saying sell FMG is based on research by its China materials analyst who reckons the heavy iron ore price discounting being suffered by FMG “is likely to continue at levels lower than consensus over the 2019 to 2021 finance years, leading to negative earnings revisions”.
Not everyone agrees. J.P. Morgan yesterday repeated a buy recommendation on FMG, noting that “achieved (iron ore) prices have rallied by 20% since July while the stock has fallen by 15%”. Ord Minnett had an accumulate tip and a price target of $5.40.
However, where the FMG v Morgan Stanley situation looks particularly interesting (if indeed it is a situation) is as a comparison with what’s happening in the US where the entrepreneurial car maker, Tesla, has been battling short-sellers with its outgoing chairman, Elon Musk, running foul of the US financial markets authority with some of his tweeted communications.
FMG is not in the same league as Tesla but short-sellers have been increasing their position over the past two months with the short-tracking website, www.shortman.com, noting that a the short position in FMG has risen from 1.45% of its issued capital on August 28 to a latest reading (October 5) at 2.25%, which is up modestly, but broadly in line with the last two years of short positions.
In principal, Tesla and FMG are on common ground in that they are relatively new companies blazing a trail in a business sector dominated by entrenched giants and are being hit on the stock market by short sellers or banks telling clients that the stock is a sell.
FMG, obviously, was not the only newsworthy event on the market in a week when investors struggled to find fair value under the double-barrelled uncertainty of US interest rates reaching what some critics call a tipping point (when bonds become more attractive than shares, triggering a share sell-off) and the US and China throwing more punches in their slugfest.
That meant finding good news was devilishly tricky, though it could be found if you looked hard enough.
Copper and nickel, for example, won a beauty parade of base metals at the annual Macquarie Bank outlook summit held in London as part of Metals Week, winning support from delegates as the metals most likely to outperform next year. Zinc and aluminium were the losers.
In Australia, despite a widespread correction, it was high-grade gold stocks which performed best, led by Bellevue, which added 3.5c to 29.5c after reporting exceptional assays from drilling at the Viago Lode inside its broader Bellevue project in WA with a best hit of 3 metres at 85.9 grams of gold a tonne – with a half-metre assaying an eye-opening 445g/t.
Black Cat Syndicate put on 4c to 22c after reporting a hit of 11m at 8.3g/t from a depth of 28m at its Bulong project east of Kalgoorlie in WA, and First Au moved up a modest 0.2c to 2.5c after intersecting 4m at 393g/t from drilling at its Gimlet project.
A handful of other stocks managed small gains but the overall trend was weaker with companies that simply managed to hold their ground seen as going well.
News events and market moves, up or down, worth reporting included:
- Highfield Resources added 2c to 59c after releasing an updated resource estimate on its Muga potash project in Spain. The latest key number is 235 million tonnes at 12.3% potash.
- Evolution Mining got an 18c boost to $2.88 after announcing that it would proceed with an underground development at its Mt Carlton goldmine in Queensland.
- Swick Mining, a drilling specialist, put on 2c to 23c after reporting a 93% increase in pre-tax profit to $6.8 million in the September quarter, with management attributing the result to shifting rigs to better-performing sites.
- Gascoyne Resources slipped 4c lower to 24c after announcing a major boardroom shuffle which includes the appointed for former Gold Road boss, Ian Murray, as a director.
- BCI Minerals added 1c to 14c after media reports that a number of buyers, including Minerals Resources and Hancock Prospecting, were interested in its iron ore assets.
- Mincor was one several stocks avoiding the sell-off with its price sticking at 38c until late trading knocked the price down to 36c, but with the stockbroking firm Bell Potter tipping it as a buy with a price target of 55c as cash flow from gold prepares the business for a re-start of nickel production, and
- Wolf Minerals succumbed to months of poor performance at its Drakelands tungsten project in Britain, falling into the hands of an administrator after failing to restructure its debts.
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