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Can I value Fortescue (FMG)?

Can I value Fortescue (FMG)?

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

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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  1. Interesting to look back at some of these comments as I’ve bought and sold FMG a number of times at a profit

  2. I just want to put my input into the oil debate and its availability in the long term.

    I have a personal friend that is currently working (CEO level) in the oil industry in Nigeria, now, for over thirty years. He tells me that every time they have drilled (100%) never missed on obtaining oil, gas and the more valuable condisant (not sure of the spelling) whether they drill in swamps, flat ground, mountains, jungles etc.

    He said that the biggest lie told to the public is that we do not have reserves and it is common knowledge within the oil industry this is what you have to do to keep prices.

    Having lived in Cambodia recently I noticed that Total the French oil company have been awarded the exploration contract much to the disappointment of the U.S. My friend also works in this area. Cambodia has huge reserves just off shore.

    Also Brazil has recently discovered a large oil reserve offshore.

    From my recollection in the early 1970’s a world meeting held in Rome, that we would run out of food and that no more reserves of metal, gas and oil would be discovered!! Mans ingenuity to dig deeper, discover more and never give up attitude amazes me and for this I am truly an optimist. I suppose Andrew Forrest would be put into this category.

    The above is just information, but it should be put into the melting pot of decision making over the long term.

    • rogermontgomeryinsights

      Great stuff Terry. Thanks for your insights. We are very fortunate to be building a group of people who in time, I suspect will all be able to assist in the assessment of investment opportunities by contributing their own experience and insights. This is the stuff that makes investing so much fun. The process is indeed as enjoyable if not more so than the proceeds.


  3. I never got on the FMG bandwagon and don’t feel at all miffed.

    But I had to question the long-term value of FMG when I saw it rise to over $100 per share and had not even dug anything out of the ground, had bucketloads of debt, a CEO who was famous for the fiasco that was Anaconda Nickel and basically had a load of old, tired ex-RIO tenements.

    Questions like – if the ground was that good, why would RIO sell them ? Could I really trust someone who had presided over the Anaconda debacle ?

    Hence, didn’t buy. Don’t regret it because it could so easily have gone the other way and in my opinion, probably deserves to.

    • rogermontgomeryinsights

      See my other replies on this subject. Commodity companies are both cyclical and when in ramp-up, even more difficult to estimate value because what they will produce, what they will earn and what it will cost are notoriously difficult to guess. Getting it right of course can be immensely rewarding.

  4. From a worker at FMG site.

    “The comment from Marius Kloppers head of BHP that FMG will never be anything but a rusty bucket of nails and they will never load more than 20 million tonnes a year,will go down as one of the great wrong calls in history,we are about to load the 50 million th tonne”

    ” Just a heads up we load at the port at a GLR (gross loading rate) of 7300 tph consistently, Rio and Bhp would be very happy to be in this ball park (i have also worked at bhp so i know a bit about how things operate) currently we sail 18-20 ships a month”

    So the more FMG output per ann the less the company is valued.
    Where can I buy your book from….:)

    • rogermontgomeryinsights

      FMG’s goal is indeed to become the lowest cost iron ore miner in the Pilbara. AFter achieve 55Mtpa, they have stated they would like to reach at least 95Mtpa. You can simply multiply these forecast volumes by the iron ore price to get a revenue number and then you can apply an EBIT margin from RIO and BHP and if you are optimistic that FMG will achieve its stated aim, adjust the EBIT margin up. That will then take you a long way to estimating a possible ROE figure and from their you can arrive at a different valuation. I like to be conservative and demand a demonstrated track record. That means that sometimes I miss opportunities but the upside is I don’t get caught up in exuberance – irrational or otherwise.

  5. Would be interesting for you to run your ruler over Burlington Rail and see if you have the same opinion on Burlington as the Oracle – he seems to have a bought a very simple business ( which would be hard to mess up ) at the US’s worst economic period etc so in how ever many years until the US is flying again he knows this business will be there to benefit strongly.

    • rogermontgomeryinsights

      Yes. Also a monopoly on its own track network and a big advantage if oil prices rise. It will be more expensive to supply diesel for locomotives but it will be four times more expensive to run trucks. This is as much a bet on higher oil as it is on the US economy. Also have a look at his comments a few years ago about how the economics of rail have changed thanks double stacking containers on carriages.

      • rogermontgomeryinsights

        A quick update. A few days after the deal was announced I did run a valuation ruler over Burlington Northern and with a couple of optimistic assumptions about the benefits of Berkshire lending the AAA rating etc estimated a value of $122 to $133 dollars.

  6. On your digression – now I wonder why Buffet thinks fuel prices are going to increase substantially? He generally only acts on what he is fairly certain about. I’ve recently read a book about the possibility of peak oil and new extraction technology (GTL, CTL technology) that may yield spectacular growth once a barrel of oil hits $200. Is this the signal we have all been waiting for?
    My reading of the peak oil issue is that it is largely based on unknowns and is more of a crude guess i.e. No new large oil fields have been discovered since the 70’s and demand has risen and is set to continue to rise geometrically as India and China industrialise. Also, we have only speculative knowledge about how much oil the very large fields still contain.

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