Iron ore price, page-39174

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09/10/21

00:25

Post #: 56675443
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Originally posted by sandy68: ↑

Mining businesses will never get that premium like other stocks. Due to the cyclical nature of the business and the vast amount of capex required
to keep turning revenue taps on, the acceptable PE is around 4-6, without net cash adjustments, nothing more than that. Finite business always get lower PE assigned by market. A PE of 10 is totally overkill.

BHP has over time always paid dividend through thick and thin, and the diversified nature of it portfolio lands it a premium. They even paid dividend in 2016 and since then market has given it a gold status. This is an exception stock.

You can look at European stocks for steel and commodities, and most of the time they sit below 5 PE. I personally haven't paid too much attention to stocks in Asia, but the ones I've looked all have the same faith, plus they have different accounting standard so hard for me compare.

My friends over in Canada share the same views about their markets on cyclical stocks.

At an institution level, they don't even talk about dividends much. When a company pays dividend, the same amount of capital is lost so it is a breakeven for them. They look at NPV, IRR and capex for a mine with a variable discount rate and I've seen them discounting cashflows at 15% then applying contingency discount to reduce value even further. They do this to factor in natural disaster opportunity costs and mining accidents payouts. I can't name the firm but one even tracks port shipping vessels through paid subscription via an AIS API key. The multiple they use is also much lower than 10.

Morningstar also use a brutal method to value cyclical companies and right now their moving target on FMG is $13 with P/FE at 3.17 with adjustments applied.

You get an idea. I'm just sharing what I've seen.

Peace.

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Hi Sandy. Thanks for your input. The reason for my P/E assessment of 10, is that it is based on a very conservative IO price for 58FE of AUD$77.32 i.e. about US$55.67. Perhaps, more realistically, If the average IO price happened to be say A$97.32 i.e. US$70.07, to arrive at the same EPS of A$1.64, the required P/E would reduce to 6.6. However, if FFI is as successful as AF suggests, the SP in 5 years could be who knows what.

FMG Price at posting: $14.25 Sentiment: Buy Disclosure: Held
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0 Great analysis

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