All,
Amidst the noise, what matters to the long term value of the company is the long term value of the product it sells. Iron ore.
Iron ore is a cyclical commodity so what matters most is the long term average price over the course of the cycle.
There are ranges of reasonable long term average price assumptions.
One poster here has stated that the IO price over the last 100 years has averaged a CPI adjusted USD60. I cannot verify that.
Champion Iron states in its last annual report that IO over the last 10 years has averaged USD98 or USD110 inflation adjusted.
Based on the cost curve, and the large amount of production with a marginal cost of just above USD100 I think a reasonable assumption is USD 100.
Please make your own assessment of what you think a reasonable assumption of long term average IO price is.
Then assume other variables such as exchange rate etc. Also decide what price to earnings ratio (PE) you are happy with.
I use an exchange rate of 0.71. I use a tax rate of 30%. I use a PE of 10. I use a long term production of 180mtpa. I use a grade discount for FMG of 15% because it makes 58%Fe product whereas the iron ore price is quoted for 62%.
Decide what production cost you will use. I use USD41 which is the stated cost on page 34 of the FMG annual report of USD31 plus an allowance of USD10 for sustaining capital.
Also decide what value you assign to FFI and IBO which are not in production yet. I use a value of either $0 or AUD$10B for each, just to give me a feel for the effect of their value on the company.
You can then calculate the market capitalisation as follows; market capitalisation = (100-41)*180000000*10*0.7/0.71 = $78B if no value is assigned to FFI and IBO or $98B if a value of $20B is assigned to IBO and FFI. This equates to a share price of $26 or $33.
I have done tables below. In these tables I have used PE=10. Tax rate = 30%. production = 180mtpa. Grade discount = 15%. All in production cost = USD41. I have then done separate tables assuming a value of $0 for FFI and IBO and $10B for each of FFI and IBO.
As you will see, the current share price once a value for FFI and IBO is included represents a long term average IO price of about USD65. I personally think this is an unrealistically low assumption for the long term average share price. In other words I think the share price at present is too low. Over the course of the metals price cycle I think FMG represents good value at the current share price.
Please make your own assessment of the value of the shares. Do not trust me. But I encourage you to do a good assessment yourself. It is the only way to get away from the emotion of the day to day hysteria of sharemarkets and hotcopper chatrooms.
Also I encourage you to look at the risks of FMG. There are risks. And to look at the balance sheet. FMG has debt but is has more cash than debt. In other words in a net sense it is debt free and has a very strong balance sheet.
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