I read a summary of the GS valuation note (and let me be clear I disagree with it) - here are what I saw as the key reasons they gave:
1. FMG is trading at a relatively higher valuation compared to BHP and RIO when compared to net assets (FMG 1.4x net assets, RIO/BHP at 0.95x)
2. FMG is trading at a high (or higher than RIO/BHP) P/E ratio 'if' IO price falls to $80-90 range
3. Worries about widening discount of 58% ore
I would counter as follows:
1. Fair enough, although FMG are attempting to build their assets through diversification (FFI and exploration/JV's etc)
2. I'm sure this is true - but it is also trading at a relatively lower P/E valuation right now. Also, considering the atrocious forecasting of the IO price historically from the investment houses - what confidence can they/we have around the $80-90 figure quoted?
3. I'm not sure the evidence shows a huge widening just now - but even so, I would hope that any proper commentary would actually look at what a business is doing now (and in the future) rather than just the 'history'. FMG have started shipping ore for blending specifically to overcome the issue of higher-grades-mean-lower-discounts. Iron Bridge is also what - 18-months away?
FMG Price at posting:
$20.22 Sentiment: Hold Disclosure: Held
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