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January 18, 2012 Dear Friend,
Fortescue Metals shipped 5.3 mmt in
December, implying faster productivity rampups, but the December
quarter price realization plummeted to $122 per tonne while direct
costs held nicely at $46.43 per tonne despite a surge to a 4.2:1
strip ratio. We raised our 2012 earnings estimate from US $0.28 to
$0.32 per share, but cut subsequent years $0.02 per share as the
8.25% recent US $1.5 billion bond was costlier than expected. There
is room to raise our price target from $9, but we will wait for more
confirmation of strong and consistent productivity gains without
setbacks.
We are concerned that Fortescue’s weak December 2011 quarter price realization suggests downside risks to our $120 per tonne estimate made in our BHP, Rio Tinto, Anglo American and Vale earnings models. In particular, Vale holds the most pricing risks due to $25+ per tonne freight penalties. Fortescue reported the average sales price for the December 2011 quarter was $122 per dry metric tonne, noting that the iron ore price index traded in a range of $170 to $116 per dry metric tonne. Fortescue’s average ore grade is approximately 58% while the iron ore index is based on a 61.5% grade causing Fortescue’s ore to be discounted by 5% to 7%. We cut our investment rating for Rock Tenn to Underweight from Neutral due to price appreciation to $65, because we cut our price target to $54 from $56 and cut our earnings estimates by 3% due to various margin squeezes. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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