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FMG shares: where next as Simandou bid comes into focus?

FMG continues to actively pursue global opportunities, just recently making a bid on a potentially sizable iron ore deposit in Guinea.

FMG share price in focus Source: Bloomberg

Off the back of a bumper year – which saw iron ore prices rise to five-year highs, Fortescue Metals Group (ASX: FMG) has delivered stellar returns to investors, with its share price rising over 100% since January.

Though FMG’s shares have softened somewhat in the last month, as iron ore prices level out, there remains much to like about FMG.

New developments emerge

In an interesting development, and as reported by Reuters, it was revealed that FMG has made a bid to develop the Simandou iron ore deposit, located in Guinea.

Reuters, citing an email statement from FMG’s CEO, Elizabeth Gaines, noted the executive as saying:

‘Consistent with our active business development program, Fortescue is interested in global opportunities in iron ore and other commodities which align with our strategy and expertise.’

Elizabeth Gaines’s statement continued:

‘Following the release of information at a public meeting held in Guinea last week, Fortescue confirms that it is participating in the tender for Simandou Blocks 1 and 2. Details of Fortescue’s bid are confidential and there is no guarantee that any bid submitted will be successful.’

FMG share price in focus

Fortescue’s (ASX: FMG) management has shown themselves to be prudent operators in recent times, following the 'the successful refinancing and repayment of its US$1.4 billion 2022 Syndicated Term Loan Facility,’ at the end of September.

In this vein, the bid for the potentially world-class Simandou iron ore deposit could create significant long-term value for the company, though it could prove equally costly.

Speaking to its potential, Morgan Stanley, noting that while there are no public records available for the particular blocks that FMG is bidding on; blocks 3 and 4 of the Simandou deposit, belonging to Chinalco, the Guinean Government and Rio Tinto – lay claim to reserves totalling 2 billion tonnes of at a Fe grade of 65.5%.

Further to this, blocks 3 and 4 have an annual production capacity estimated at 100 million tonnes.

While not an exact estimate for the blocks FMG is bidding on, it gives those watching the situation some indication to the potential 'world-scale' and quality of the sites.

No problems?

Scale aside, Morgan Stanley has flagged potentially high infrastructure costs as well as asset proximity to ports (given Guinea’s mandates concerning ore exports) as core issues.

Such matters are not helped by Morgan Stanley’s view that the iron ore market will be in surplus in the medium-term.

Indeed, news of Fortescue’s (ASX: FMG) bid has done little to move Morgan Stanley’s ‘Underweight’ rating and its A$7.85 share price target.

Since the middle of August FMG’s share price has risen 27%, though its stock is down some 1.74% today.

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