Over 40 years’ heritage
185,800 clients worldwide
Over 15,000 markets

Trade call: short-term trade in FMG

FMG has just logged its lowest intraday price since July 2009, falling below the magical $2.00 per share price point.

Iron Ore
Source: Bloomberg

The price decline in iron ore remains in freefall. With Goldman Sachs joining Citi, JP Morgan and UBS to downgrade their forecasts on iron ore to be below US$70 a tonne by the year-end, the rout in the commodity looks like it’s here to stay, adding more pressure to the share price.

What is also detrimental to FMG is it ferrous content; recent output has been below the 62% price grade. The haircut price on 58% content is a low $US53.54 a tonne. This puts FMG at breaking even on operating cost – it is underwater on a total all-in sustaining cash-cost basis.

The key stats:

12-month forward P/E estimate: 9.7x – current P/E 8.2x

Estimates earnings per share in FY15: US$0.26

Net debt: US$7.301 billion - debt to equity ratio: 93%

12-month high $6.02 – 12-month low $1.92

Potential Trade:

With FMG trading at the current price, it will see some form of ‘bargain buying’; I see this as a trap. I would look to short strength to $2.25, which is the top of the downward channel. Leading into the earnings release on February 17, it is likely to move with the iron ore price (to the downside) with expectations of disappointing first-half FY15 earnings.

I would look to exit the trade pre-release to mitigate trading around announcements.  FMG is a very fast moving trading stock; stops could be trailed to mitigate profit erosion potentially at $2.35 which is the break above the strong resistance level. I would look to exit the trade either around $1.70 (which is above the 2009 low) or before the February 17 release - whichever is first.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.