morningstar fair value, page-10

I thought i would come back and update this thread with the outcome of the Morningstar fair value review of FMG.

What do they say to the people who took their $2.20 seriously? Its the only recommendation on eTrade that comes with a standard login....and they left it there until Nov.

"Sorry?", "Whoops!", "We've fired the old guy!". Who knows.

Our fair value estimate for Fortescue more than doubles to AUD 5.50 per share, from AUD 2.20, following a thorough review of our model and our underlying investment thesis. Key assumptions include cutting the cost of equity to 13% from 15%, and reducing the average cost of debt to 5.5% from 6.5%. We've also reviewed Fortescue's longer-term capital investment requirements. Its revenue, cash flows and financials are denominated in U.S. dollars, and we now use an AUD/USD exchange rate of 0.95 to translate those U.S. dollar-denominated cash flows for our fair value estimate, as opposed to 1.00 previously. In their current trading range, we think Fortescue's shares are close to fairly valued. Our new fair value estimate stems from a cluster of collectively favourable, fundamental changes, coupled with the high leverage in Fortescue's business. The ramp-up of production to 155 million tonnes is on track, and expansion risk is diminishing. Peak capital expenditure has passed, and cash flow is increasing with volumes, assisted by still-favourable iron ore prices. Central bank efforts to lower interest rates gave Fortescue access to cheap, long-term debt and ample funding. The lower AUD/USD exchange rate is also a plus, effectively lowering the cost base in U.S. dollars and providing a kick to margins. Cash flow is now sufficient to make further growth likely and we factor in 3% volume growth from fiscal 2015 as our base case. We upgrade to a Standard stewardship rating but maintain our no-moat and very-high fair value uncertainty ratings. Fortescue's margins still trail the industry average due to higher cash costs and lower product quality. It also suffers higher capital intensity from investing near the peak of the mining boom. By fiscal 2018, we expect return on invested capital to be 11.1%, slightly above our reduced 10.7% cost of capital assumption. However, excess returns are unlikely sustainable given low-cost expansions, and slower global growth in steel demand.