$40m vote of confidence in the mining boom


Who said the mining boom was over? Certainly not Andrew “Twiggy” Forrest, one of Australia’s richest men, who has put $40m where his mouth is.

Forrest, chairman of under siege Fortescue Metals Group (ASX: FMG) has bought $38.5 million worth of shares in the company so far this week. Over the past year, he has purchased $143.5 million worth of shares.

He currently owns more than one billion shares, around 32% of the company, and has told The Australian he’s keen to keep buying.

Fortescue has seen its share price fall by more than 14% in the last month, as iron ore prices have crashed by 25% over the same period. Reports today suggest the iron price has fallen below US$90 a tonne and is currently trading around US$88.70, less than half of what it was trading at in 2011.

Other iron ore miners have suffered too. Atlas Iron (ASX: AGO) has seen its share price fall 20%, while Gindalbie Metals Ltd’s (ASX: GBG) share price has taken a 16% haircut and Mount Gibson Iron’s (ASX: MGX) shares are down almost 24% over the last month.

Mr Forrest and Fortescue’s CEO, Nev Power, have suggested the falls have been overdone and that current iron ore prices were unsustainable. At a presentation on Wednesday to the Mining Club, Mr Power predicted the iron ore price could fall further from here, before rebounding back up to around US$120 a tonne with the next few months.

At current prices, the theory is that it makes many Chinese iron ore producers uneconomic, and therefore the government is more likely to step in and support the industry. Many of the iron ore miners are banking on that happening – the other option is unthinkable, but it could result in several higher cost producers struggling to survive.

Short sellers are predicting further price falls in Fortescue’s share price, with the company the most heavily shorted stock on the ASX.

In further bad news, ratings agency, Moody’s has today placed Fortescue’s credit rating under review for a possible downgrade, following the falls in the iron ore prices to below their expectations. That could have implications for Fortescue’s US$8 billion of debt, and could potentially see the company forced to raise equity.

If that scenario plays out, shares would most likely have to be issued at a substantial discount, which could see the share price fall further.

The short sellers are betting on it.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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