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How to lose $1 billion in 14 days

Australian billionaire, Andrew ‘Twiggy’ Forrest has seen his personal fortune fall by $1.2 billion in the last fortnight. With $3 billion of his wealth tied up in his 32% shareholding of Fortescue Metals, his fortunes will likely mirror the company he founded.

Its possible that Fortescue shares have further to fall. Iron ore prices could hit US$50 a tonne by mid-2013 and stay there, according to independent economist Andy Xie, based in Shanghai.

That contradicts several experts views that the iron ore price is likely to return to around US$120-US$150 a tonne before the end of the year. Fortescue Metals Group Limited (ASX: FMG) CEO, Nev Power, and BHP Billiton Limited’s (ASX: BHP) Marius Kloppers both recently expressed their view that iron ore prices will recover, but is that more hope than belief?

In a move that suggests Fortescue has changed its view that the iron ore price might not recover, the company has cut back its current year’s capital expenditure by US$1.6 billion, sacking more than 1,000 workers and sold off a power station for US$300 million. Long serving executives were amongst those sacked, dealing another blow to investor’s confidence. Production targets have been cut from 155 million tonnes to 115 million tonnes.

The fallout has spread to the mining services companies too. NRW Holdings Limited (ASX: NWH), which is providing contract mining services to Fortescue, revised its expected 2013 financial year revenues down by $100 million to $1.2 billion yesterday. Other contractors, including Downer EDI Limited (ASX: DOW) are likely to be affected.

Fortescue could even be forced into a capital raising to shore up its balance sheet. With more than US$8 billion of debt, versus $2 billion in cash at the end of June 2012, the company’s bankers may have become slightly worried. Chairman, Andrew Forrest may also be concerned, as an equity raising could dilute his current 32% holding in the company. It’s likely that any capital raising would have to be done at a discount to the company’s last traded price of under $3.00.

The spot iron ore price fell again overnight, and is currently trading around US$86 a tonne. Fortescue has admitted that even at US$90 a tonne, the company would struggle.

The Foolish bottom line

Even if the spot iron ore price recovers over time, we could see the short-term effects on other iron ore miners, who may be forced into equity raisings to shore up their balance sheets.

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Motley Fool writer/analyst Mike King owns shares in BHP. 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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