Short sellers hack into Forrest Andrew Main | August 04, 2008 IRON ore tycoon Andrew Forrest is under attack from international hedge funds in a co-ordinated short-selling blitz against his Fortescue Metals Group -- a campaign that has caused the company's stock, and the executive's paper fortune, to slump by more than 37 per cent in just over a month.
The company's broker, Southern Cross Equities, has sent a note to clients that leaves no doubt as to why it considers the stock has fallen: "FMG shares have been subject to an aggressive and co-ordinated shorting campaign from a high of $13.15."
The stock went as low as $7.91 on Tuesday but by Thursday had rebounded to a $8.70 close on a day of particularly heavy trading, with 45.5 million shares going through.
Then the price fell 43c on Friday after the temporary stranding of an ore carrier in the Port Hedland shipping channel -- a problem rectified at high tide.
The Australian has separately confirmed from reliable sources that several overseas hedge funds are short-selling Fortescue shares, mostly on the basis that they consider Southern Cross's prediction of a continuing shortage of iron ore in the world in 2013 to be too optimistic.
The short sellers declined to be identified.
Shorting involves selling shares that traders have borrowed, but do not own, with a view to buying "back" the stock at lower prices later.
Charlie Aitken, head of institutional dealing at Southern Cross and a long-term champion of the stock and its founder Mr Forrest, says in a client note that during the volatile period "absolutely nothing changed fundamentally for FMG".
"If anything, the fundamentals got stronger," he said, pointing to the fact that Chinese steel mills had agreed to pay Fortescue a partial freight rate differential for Australian iron ore.
He notes three possible reasons for the short selling: one, that cargoes had allegedly not been up to standard; two, that there would supposedly be problems in raising further debt to expand the project; and three, that there could be a global iron ore surplus as early as 2010.
"The key reason given for the shorting of FMG is an unfounded market rumour that initial cargoes of FMG ore have not been up to the specification expected by the Chinese mills," he adds. "That is absolute rubbish in my opinion."
Southern Cross Equities' forward price projections come from Sydney analyst Metalytics, which forecasts that ore prices will keep rising for the next four years at least. The Metalytics numbers show that aside from jumping by 76 per cent in 2008, lump iron ore prices will keep rising for the following four years to reach a price almost 200 per cent higher than last year's prices.
The Government's commodity statistical service, Abare, takes a more cautious view in its first-quarter outlook document, noting that Australia's iron ore export earnings "are forecast to peak in 2009-10 at around $34 billion (in 2007-08 dollars) before an expected decline in iron ore prices results in a decline in iron ore export earnings in real terms" inthe forecast period leading to2013.
Abare's second-quarter outlook document does not forecast prices past 2009, at which point they are widely expected to be still rising.
The only adjustment to the first-quarter projections is to say that 2009-10 earnings might hit $35 billion, $1 billion more than the first-quarter forecast.
In Mr Aitken's own words: "Our forecast is 52 per cent above that of the bears and of course that makes a huge difference to FMG earnings".
"Very small changes to iron ore price assumptions have huge ramifications for valuations and earnings estimates," he says. "All the analysts who are imputing net present value of $5 for Fortescue stock are assuming that the long-term price of iron ore will revert to a mean growth path," he says. Aitken's parting shot is that short selling "is part of today's markets and I don't want anyone to believe mistakenly that we are anti-shorting".
But, he notes, "we are happy to take on the shorters head-on at current prices and see where we are in 12 months".
FMG Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
(20min delay)