On Richard Goncalve’s Market Moves show on the Sky Business Channel last week I mentioned I would estimate a value for Fortescue Metals Group (ASX:FMG). Let me be the first to say that, like IT businesses, companies in the resources sector are notoriously difficult to value. This is not because they are in a fast changing industry whose long term economics are difficult to predict, but because the economics are based on commodity prices that change daily and whose prediction is almost impossible.
Having said that I should offer a caveat; Buffett’s announcement that he is buying the railroad operator Burlington/Santa Fe in a $44 billion deal – his biggest ever – suggests he truly believes that fuel prices are going up a lot. Indeed while higher diesel prices will raise the costs of running trains, it will raise the cost of operating trucks over trains by a factor of four.
But I digress, FMG – based entirely on 2010 consensus analyst forecasts – is worth $1.90 to $2.00. Another caveat – consensus analysts predictions could be wrong.
By Roger Montgomery, 4 November 2009