weak china steel demand will continue! , page-12

Here's some actual fundamental math for crazy.

FMG's all in cost is US70-75/tonne, which include sustaining capex and interest payments. (actual operating cost is $US53/t, just above bhp)

So if Iron ore drops to a sustained $US90/t for eg they should print $2.3bn-$3.1bn EBITDA running at 155Mtpa.

Thats $1.61bn to $2.1bn NPAT on straight 30% tax rate - though I expect they wont pay that much given their offsets.

At say $1.85bn NPAT the stock would be on roughly 12xPE ratio (the sector avg at the moment is 11.89 according to commsec).

Thats why there was buying yesterday.

At $4.50 stock price for FMG, a $US90 iron ore price is priced in.

There isnt a realistic debt threat like there was 2 years ago unless China manages to signifcantly cut its iron ore cost of production.

- see Slide 15 in current FMG preso.

If we accept that, then $US90/t would make all domestic Chinese iron ore unprofitable at this stage - that is 30% of global supply.

So it seems unlikely we'd see iron ore go sustainably below $90 in the medium term - though it could dip into the 80s for a little while.

-the other factor is 94c AUD to the USD. If iron ore really drops to $US90 long term - the AUD will fall and so AUD earnings would rise.

- i dont disagree that momentum trading could well knock the stock down and around for a while. but fundmentally most of a possible decrease in iron ore is already factored in.

ive never been particularly an FMG bull - but around these prices FMG has considerable upside and limited downside to around $4.20 on my math.

The x factor is sector PE ratio compression. But there is nothing to suggest a much greater

- the biggest myth being perpetrated at the moment is that lower China GDP and lower iron ore price means falling demand. That is fundamentally incorrect.

Yes there has been some recent weakness in buying as port inventories got very high - but steel production continues to set new records in total output. And to my knowledge it is still taking about the same amount of iron ore to kick our a given quantity of steel.

DYOR