Fortescue – the proxy for iron ore

FMG is becoming the clearest way to play the iron ore price.

Since the start of the slide on the in the underlying commodity FMG has tracked the fall almost one for one.

Iron ore has now fallen from US$118 a tonne to a double digit read of US$97.50 a tonne; a fall of 18.3%. FMG has tracked this fall almost perfectly; losing 20.1% over the same period to $4.57 from $5.59. FMG is the proxy play here as it derives 98% of its earnings from China; it is highly impacted by Chinese growth and steel demand and it is therefore the purest way to gain exposure to these metrics.

What will be interesting over the coming 12 months for FMG is how much of its de-risking strategy can de-couple it from this trade.

The Pilbara story continues to ramp up, the expectation of its 155 mega tonne per annum output target looks like being completed in the next few weeks and it continues to de-risk by lowering its debt position - something that has been questioned by rating agencies and investors alike over the years.

Christmas Creek and the Kings Development Project are transitioning from capex-heavy construction phases into lower capex, higher income productions phases. The other advantage this will have is margins improvement, which will cushion the decline in the iron ore price.

However this is a 12 month outlook and considering there was negligible value to be attributed to the share price on current upgrades to the Solomon numbers, and the fact that earnings in the first half where positively impacted by a falling AUD, investors are unlikely to see FMG in a fundamental light.

FMG is therefore likely to continue to be the perfect proxy trade to the iron ore price. It is currently gapping above the iron ore price and in the interim there is a real chance that is it will follow the price lower as investors continue to question the China story.

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