Thursday, March 26, 2015

Fortescue Metals Group: Great Execution, Bad Timing

This article was first published by Seeking Alpha on March 20, 2015

By Sarfaraz A. Khan

The iron-ore miners have been struggling due to the slump in the commodity's prices but the industry leaders such as BHP Billion (NYSE:BHP), Rio Tinto (NYSE:RIO) and Vale (NYSE:VALE) are in a strong position to weather the slump. However, Fortescue Metals Group (OTCQX:FSUGY), world's fourth biggest iron-ore producer, is caught in the downturn.

Unlike other diversified mining companies, the Perth, Australia based Fortescue Metals Group is a pure-play on the sea-borne iron-ore market for China. Fortescue was formed in 2003 to tap into the growing iron-ore demand from China. The company began hunting for the commodity in the Pilbara region of Western Australia - where BHP Billiton and Rio Tinto have also invested billions - and discovered high-quality deposits in the Chichester and Hamersley Range. It started building its first mine in 2006 and made the first shipment in 2008.

In the subsequent years, Fortescue underwent phenomenal growth, especially during 2010-14 when the company embarked on its ambitious debt -powered $9.2 billion expansion plan to almost triple its seaborne iron ore production rate to 155 mtpa (million tonnes per annum). It was also impressive that Fortescue completed the expansion work ahead of schedule in 2014.

When Fortescue announced its expansion plan, the market had strong fundamentals with healthy demand coming from Asian customers, particularly from China, as the commodity's price climbed by more than 40% in the second half of 2010. Meanwhile, Australian iron-ore producers had a unique advantage to tap into this demand thanks to their proximity to … read full article at Seeking Alpha