Iron Ore Price, page-857

CBA analyst Andrew Hines in a recent note to clients pointed out a potential fly in the ointment: "Although Fortescue correctly points out that it has no debt due until 2017, the 2017 notes have a first call date in April 2015.

"Bond markets price these notes on the assumption that they will be called on the first callable date. If Fortescue does not redeem the 2017 notes next month, then it may find bond markets demand even higher yields for any future bond issues."

Hines has a 12-month price target of $1 for the stock. His is the lowest, while Bell Potter's at $3.80 (adorned with a buy rating) is one of the highest. That's quite a range.

Penagana Capital global resources fund manager Tim Schroeders reckons a share price of $1.50 looks better value on a risk and reward basis.

"While things look dire at the moment, we still put a low probability of Fortescue going broke," says Schroeders, who doesn't own the stock. But he adds that the company is "not going to be profitable in the near-term; the momentum is clearly negative and it will really test the wherewithal of investors".
All of which may make you think Fortescue is best left to the short-term punter betting on day-to-day commodity and currency price moves.

Not so. Schroeders argues that longer term, contrarian and value investors may be willing to sit out the volatility. And in fact, there is evidence that one such institution is doing just that. And not just any, the world's largest active funds management group.

The gigantic US-based investment house Capital Group, which manages $US1.3 trillion in assets, revealed in early February it had become a substantial shareholder in Fortescue, adding 68 million shares to its pile at an average price of $2.34. It then picked up a further 32 million shares at an average price of $2.45 between February 11 and March 3 to become the miner's third-biggest stakeholder with 6.1 per cent of the issued shares.

Unfortunately, Capital Group has a policy of not talking about individual companies, but the local head of operations did confirm the company invests on a three to five-year basis. They obviously believe Fortescue will survive that long. But it will be a bumpy ride.