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.

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