fmg and fe, page-369

From Stuart at FMG

Thanks for your email and apologies for the delay in getting back to you. We are currently on the road post our half year results speaking to funds in in the US, UK and Aust.

We certainly appreciate your position and agree that shorters create short term volatility in the share price. We have looked into this on a number of occasions and considered how to try and influence the activity of shorters. This has included speaking directly to the underlying owners who loan their holdings to the shorters to try and influence the number of shares available for shorting in the market. Unfortunately, many of the underlying owners have an investment mandate which requires them to be made available.

We have also spoken to many of the hedge funds to get a better view of the motivation they have to short and to those who have turned long to get an idea of how best to take volatility out of the market. Interestingly I spoke to a long only value fund in New York on Sunday who thinks that it is good to have shorts playing in the stock as they create liquidity and options to generate higher returns - provided the fundamentals of the company are solid.

Our constant focus has been on ensuring that the fundamentals of the business are strong, reducing cost, improving cashflows and repaying debt which, together with market dynamics has seen the share price increase from $1.50ish to $6.47 today. There is still some work to do on the capital structure and debt repayments to further de-risk Fortescue and transfer further debt from debt holders to equity. Interestingly, over this period the total volume of shorts has decreased from around 300m shares to below 100m shares currently.

Sticking to our business and focussing on debt repayment, increasing returns to shareholders and investing in the iron ore business will continue to remove risk associated with volatility in China which is what the short sellers focus on.

In terms of the algorithmic machine based orders, a greater volume of daily trading is designed to take advantage of intra day patterns. And the intra and inter day volatility of FMG will attract more trading (both machine and fundamental) all else being equal than a similar (free float) sized company. The question is whether the intra day trading bring the volatility or vice versa?

We constantly monitor trading activity, make company releases in strict accordance with ASX continuous disclosure requirements and the obligations and the needs of the business.

As a fellow shareholder I understand your position and am also frustrated by the volatility intra-day. However, our view is that focusing on the fundamentals of the business and delivery of returns to shareholders is the best way to combat short volatility. I would be happy to discuss this further with you when I get back from the results roadshow in a couple of weeks. Please feel to let me know when it is convenient or contact me directly on the numbers below.

Regards,
Stuart