Iron ore price, page-33919

Well firstly FMG’s share price is a volatile random process so +/- a few dollars movement could just be randomness that has no explanation aside from luck - good or bad.

But I think there is a simple and obvious explanation for the "grind higher", to tease out the valuation implications I’ll use a dummy example and then relate that back to FMG, let’s assume:

• A stock trades at $10.
• The stocks DCF valuation is $10 and the market expects $1 dividend/year.
• The company effectively pays out all its profits in dividends.

If something happened to boost current year dividends from say $1 to $2, but all future dividends were expected to remain as initially forecast, the stock should trade up to $11 prior to the dividend payment to account for the unexpected additional $1 in earnings/dividends that year before that value is removed from the stock price following the dividend payment.

This is not too dissimilar to FMG’s situation in which analysts still seem to retain the view that Iron Ore will fall back a long term average and there is no change in FMG’s production profile, however, the “unexpectedly and persistently” high Iron Ore price is causing short term dividends to constantly increase above expectations, without changing long term dividend expectations.

Since the last dividend payment, the expected final dividend for FY21 has certainly increased above initial expectations and so is the interim dividend for FY22 and possibly the final dividend for FY22, so I suspect you are seeing that be reflected in the share price – however a higher share price before larger dividend payments will be negated by a larger drop after those dividend payments.

There will only be a re-rate if long term IO expectation and as a result DCF valuations change.

I understand there is some reinvestment of profit via FFI and potentially future growth, but it is not known if that will be profitable or not at this stage.

This is how I think about and trade the current situation.