fmg sp ignores high risks

To the credit of FMG they do (unlike many other companies) post broker's analysis on their website.

Two things struck me to agree with TOLHURST (24 pages of stuff!!) that FMG is 'HIGH RISK.' But Tolhurst analysis has a major flaw making in my opinion FMG a MUCH higher risk than they indicate.

Tolhurst itemise the breakdown of FMG product. Current BHP & RIO negoiatations which China are focused on the highly desirable 'lump' ore. As Tolhurst state, lump ore sells at 28-33% premium to 'fines and rocket' IO product.
FMG product contains only 10% lump ore!


I agree that FMG is MASSIVE. Already 3.3 BILLION tons discovered and they have only explored 10% of their Australian tenements. Remember FMG also have huge IO deposit in Solomns yet to be mined.

So yes, the total IO asset owned by FMG is world class in size. FMG are one month away from loading the first ship. But FMG could soon be a victim of their own success. IO price (all contracts in US$) will peak in 2009 then stabilise for say 2 years and then decline steadily to 2005/6 prices which at US$50/ton are half the current price.

The other serious danger is the strength of Oz $. Tolhurst estimate it will stay at aprox. US$0.75 for next 10 yrs (after 2008 @ 85c)and have based their profit projections at this rate.

If A$ stays at US$0.93 (v 0.75) then revenue is reduced by 20%.
At US1.00 rev reduced by 33%
At US1.125 rev reduced by 50%
At $1.25 rev reduced by 66%.

6 yrs ago A$ =US$0.49. The greenback is in serious strife as US govt has trillions of unpayable debts. Hence, one must build the strong A$ into FMG calcs.

A drop in real price of product has disporportionate affect on profits. It goes straight to the bottom line as mining overheads remain the same (at best).

I mostly agree that FMG can produce the incredible tonnages projected for 5 years hence although the long low machinery being used is untested on a big scale.

But supply (even with growing Indian economy) will soon exceed demand and miner's profits are at high risk.

The Chinese know all this. They will pay high prices this year knowing massive expansion in producing nations is well underway, and price of IO will fall substantially due to oversupply. They always think long term.

Hence, i see no logic in a Chinese bid for FMG. Let Aus and Brazil build the mines and ports. They will have an ever increasing supply at a decreasing price.

DYOR