lets work out fmgs cash flow

FMG expects to produce a conservative 55mt this year with an average grade of 60% fe.

the current benchmark price is $144 USD per tonne.

lets assume that the benchmark price falls by 25%, ie to $108 USD per tonne.

lets assume the long run AUD/USD rate is $0.75.

lets assume that FMG's debt of $3b AUD is charged 10% pa in int.

lets also assume that all FMG's customers dont increase or decrease consumption and that they all pay their bills.

one last assumption, assume that FMG's cost per tonne is $25 AUD.

so they will produce 55mt x 60% x {($108/$0.75)-$25} = 33mt x $119 AUD per tonne = $3.927b AUD in profit from the ore sales.

less the int of $3b x 10% = $300m AUD.

Therefore FMG should still make $3.927b - $300m = $3.5b AUD.

for FMG's price to fall further the fe price will have to really collapse. remember that the spot price was $200 USD per tonne last year, so the fall in benchmark prices wont be as drastic as the spot market. i think 25% is quite reasonable.

so $3.5b of EBIT x 4 = $13.4b. If FMG is trading around this level then it quite attractive, if the benchmark price falls further than 25% or the AUD goes back over $0.75 then the price will weaknen, BHP is still trading on a forward PE of 6x.

so i suggest all you doom and gloomers out there look at the fundamentals first, then try and work out a fair entry level.