FORTESCUE Metals chairman Andrew Forrest defiant in the face of sharp falls in iron ore prices and mounting evidence that the mining boom is rapidly losing steam splashed out nearly $40 million to shore up confidence in the mining company he founded.
In what is being seen as an attempt to flush out short-sellers circling the company, Mr Forrest, who now holds just shy of one-third of the miner, declared he would "continue to accumulate" shares in Fortescue, despite shares slumping 15 per cent in the past week to a more than two-year low.
The move came as spot benchmark iron prices tumbled to a post-financial crisis low of $US90.30 and the Chinese giant Baoshan Iron and Steel warned that global demand for iron ore would remain subdued, and could even drop.
"I certainly expect prices to bounce," Mr Forrest said in Perth. "I think it's been completely overdone."
With major miners BHP Billiton and Rio Tinto trading near milestone lows, and bulk commodity prices continuing to fall, yesterday's ABS Investment intentions survey indicated that Australia's mining investment boom was also gradually coming off the boil.
Nearly $1 billion in value was wiped off major listed mining services providers yesterday, which are expected to be hit especially hard by project delays.
The Utah-based Boart Longyear plunged 37 per cent, while ALS (formerly Campbell Bros) was down 8.7 per cent, Ausdrill down 11 per cent and Imdex off 19 per cent.
Confidence within the industry was rocked by last week's news that more than $50 billion worth of projects, including BHP Billiton's planned Olympic Dam expansion, have been indefinitely put off. Mining and media magnate Kerry Stokes insisted Australia's economy would withstand falling commodity prices and a slowdown in China.
"Our mining industry is sound," he said. "We may have to take the tops and the bottoms off, but at the end of the day we have a very sound opportunity to build long-term futures as a supplier to our eastern neighbours, including China and Japan and India."
The slump in commodity prices stems largely from fears that China's economic growth is slowing.
Mr Forrest yesterday acknowledged the days of iron ore prices at $US180 were over, but added that yesterday's spot price was an "overreach on the other side".
He said the sharp drop in prices was due to distressed steel mills in China running down their inventory stockpiles, but they would have to return to buying iron ore within months to fuel the underlying growth in construction in the Chinese economy. Mr Forrest's Fortescue share purchases, totalling $39 million across two separate tranches, were small compared with his existing stake, but also follow a $105 million buying spree in June.
Beijing-based analyst Tim Murray, of J Capital Research, said he agreed that iron ore prices would begin to edge up by October as demand stopped falling. "I just think the destocking has been pretty large and it's hard to continue," he said.
Patersons' Alex Passmore said a floor would likely still come, but it needed some time. Patersons last month downgraded its long-term forecast to $US80.
Mr Passmore said that because of earnings downgrades that he forecasts would flow through the market, iron ore stocks still had some way down ahead before a pick-up.
"They can trade below valuation for some time," he said. "Over time the stocks will be proven to be cheap at current levels, but at the moment if you're buying these stocks you're buying cum-downgrade for financial year 2013 and 2014."
with Paddy Manning
Frequently Asked Questions about this Article…
What did Andrew Forrest do to support Fortescue Metals and why?
Fortescue chairman Andrew Forrest spent nearly $40 million (about $39 million across two tranches) buying Fortescue shares to shore up confidence in the company he founded. The article says he made the purchases to fend off short-sellers and signalled he would “continue to accumulate,” after shares slid sharply.
How badly have Fortescue shares and iron ore prices fallen?
The article reports Fortescue shares slipped about 15% in the past week to a more-than-two-year low. Spot benchmark iron ore prices plunged to US$90.30 a tonne, a post–financial crisis low.
Why are iron ore prices and mining stocks falling right now?
According to the article, the slump stems largely from fears China’s economic growth is slowing. Beijing’s Baoshan Iron and Steel warned global iron ore demand will remain subdued; Chinese steel mills have been running down inventory (destocking), and several major projects have been postponed, all weighing on prices and miner shares.
How have mining services and contractors been affected by the downturn?
The article says nearly $1 billion in value was wiped off major listed mining services providers after project delays. Examples cited: Boart Longyear plunged 37%, ALS fell 8.7%, Ausdrill was down 11% and Imdex off 19%.
What do analysts quoted in the article say about the likely outlook for iron ore prices?
Beijing analyst Tim Murray (J Capital Research) expects iron ore prices to begin edging up by October as destocking stops. Patersons’ Alex Passmore says a floor will likely come but it will take time; Patersons recently downgraded its long-term iron ore forecast to US$80 and warned earnings downgrades could push stocks lower in the near term.
Does Andrew Forrest believe iron ore prices will recover?
Yes. Forrest acknowledged the days of US$180 iron ore are over but described the recent fall to around US$90 as an “overreach on the other side.” He expects prices to bounce, arguing Chinese steel mills will return to buying within months to support construction demand.
What practical implications does the article suggest for everyday investors in iron ore stocks?
The article highlights caution: analysts warn iron ore stocks could trade below valuation for some time as earnings downgrades flow through, and buying now may be “cum-downgrade” for financial years 2013 and 2014. That suggests investors should be aware of near-term downside risk even if a longer-term floor may eventually appear.
Are there broader project or economic risks noted that investors should know about?
Yes. The article notes more than US$50 billion worth of mining projects, including BHP Billiton’s planned Olympic Dam expansion, have been indefinitely postponed, signalling a cooling in mining investment. At the same time, media magnate Kerry Stokes is quoted saying Australia’s economy can withstand falling commodity prices and a China slowdown.
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