Volatile pastStill, it’s worth remembering Forrest’s wealth has...

Volatile past

Still, it’s worth remembering Forrest’s wealth has jumped around dramatically in the past, typically in line with the iron ore price.

Indeed, what was unusual about 2019 was that the Fortescue share price in effect de-coupled from the iron ore price when it peaked in July 2019; while iron ore fell 25 per cent from that point, Fortescue’s share price actually rose 14 per cent, which says plenty about how well the company is being run these days.

But the big question is, where does Fortescue – and by extension Forrest’s fortune – head in 2020? That is likely to depend on the trajectory for iron ore, which on Friday morning sat around $US94 a tonne – still way ahead of the long-term average of $US55 a tonne, which is incidentally also the price built into Treasury’s federal budget assumptions.

Veteran UBS mining analyst Glynn Lawcock has had so many queries about what Fortescue is really worth that he recently developed a model to allow clients to play around with variables such as iron ore prices, exchange rates, strip ratios and dividend levels to deliver various valuation methods.

But to boil it down, Lawcock’s net present value for Fortescue of $8.00 a share is based on the long-term iron ore price of $US55 a tonne. He believes that iron ore will eventually get back down to that level, as supply from Brazil comes back on stream and there is more ore floating around the world than is needed.

But his model also suggests that every $US5 a tonne movement in the iron ore price adds about $1.62 per share to Fortescue. And that arguably makes Fortescue look cheap at its current price of $10.78.

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