fmg opinion by citigroup of today

PLEASE DO YOUR OWN RESEARCH, as a matter of courtesy i pasted and posted this report, as mnay have no access to this one. THE REPORT DOES NOT REFLECT MY OPINION.

Fortescue Metals Group
Blue Sky Priced In
Rio Tinto has settled iron ore prices with Baosteel at +80% for fines and +96.5%
for lump. The numbers are in-line with our forecasts for fines but higher than our
forecasts for lump. The modest uplift from lump settlement to Fortescue has been
offset by a higher A$ in FY09 and our estimate is downgraded 3% to A$840m. In
FY10 our earnings estimates have increased by 4% to A$2,540m. Our target
price increases from to A$8.70 from A$7.00.
Our A$6.40 Net Present Value (NPV) on Fortescue assumes a 50% probability of
expansion to 110mtpa, +30% for the 2009 iron ore settlement (and roll-over for
2010 & 2011) and a long-term price of US$60/t. To get the NPV to share price,
we’d have to assume a more than doubling of existing resources, 100%
conversion to reserves and all expansions to 200mtpa. We always expect
resource stocks to trade at a premium to NPV given the ability to increase
resources and expand production, but this looks to us like a substantial amount of
blue sky potential has already been priced into the stock. Additionally, every 5¢
increase in our long term A$ forecast (currently 75¢) reduces our NPV by
A50¢/share in our base case and A$1.30/share in this stretch case.
We believe expansion is key to valuation and therefore the ability to fund it is
crucial. On our ramp-up schedule, cash is only ~A$100m at the end of the year
and could be eroded with any further capex increases. The key risk to our Sell
recommendation is corporate activity, with the scramble to secure iron ore supply
driving the stock higher. We doubt that a buyer will be prepared to pay a premium
without control, which ultimately rests with Andrew Forrest’s Metals Group.
Company Updates
Rating Hold, High Risk (2H)
Price $6.36
Target Price $9.50
Expected Total Return (%) 49.4
Market Capitalisation ($Abn) 2.1
BNB.AX (Y/E Dec) 2007A 2008E 2009E 2010E
Rpt NPAT ($Am) 643 667 452 496
Core EPS (A¢) 174.5 176.1 117.2 128.5
EPS Growth (%) 52.0 1.0 (33.0) 10.0
P/E (x) 3.7 3.6 5.4 5.0
DPS (A¢) 54.4 54.9 36.6 40.1
Yield (%) 8.6 8.6 5.7 6.3
Source: company reports, Citi Investment Research
Research Publication Date: 26 & 30 June 2008
Rating Sell, High Risk (3H)
Price $12.13
Target Price $8.70
Expected Total Return (%) -28.3
Market Capitalisation ($Abn) 34.0
FMG.AX (Y/E Jun) 2007A 2008E 2009E 2010E
Rpt NPAT ($Am) -68 -1,067 840 2,540
Core EPS (A¢) 5.4 (2.7) 29.8 90.0
EPS Growth (%) 7,331.0 (149.0) 1,216.0 202.0
P/E (x) 222.6 (454.7) 40.7 13.5
DPS (A¢) 0.0 0.0 0.0 0.0
Yield (%) 0.0 0.0 0.0