Iron ore price, page-33565

Further analysis from BoA

Fortescue Metals Group Ltd. (FSUMF)Our $29.00/sh price objective is based on 1.1x NPV. Key components are a 40-year DCF valuation, which applies a WACC of 10% (RfR 5%, ERP 5% and Beta of 1.2x for a Ke of 11.2%) to the estimated life of mine cash flows. Through the cycle, bulk commodity miners trade at 0.6-1.6x NPV with higher multiples being paid during periods of rising commodity prices. Downside risks: 1) FMG's key commodity, iron ore, is skewed to the demand profile of the major global buyer, China and relative growth of industry suppliers. With slowing Chinese growth, iron ore prices could fall, which could negatively impact FMG also additional growth from industry players above forecasts could lead to lower iron ore prices and also FMG, 2) FMG continues to pay down debt and a decrease in iron ore prices may pressure repayments, however this risk is lower than prior years. Upside risks: 1) Favourable moves in iron ore above our LT estimates and also a lower the A$/US$ currency would lower FMG's cost position and 2) a slowing of mining growth in Western Australia has seen input prices (labour being key) moderate -- these could fall further and lower costs further than our estimates