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Twiggy ups Fortescue stake

Andrew ‘Twiggy’ Forrest, chairman of Fortescue Metals Group (ASX: FMG), has upped his stake in the company, buying more than $23 million worth of shares.

According to a company announcement, Mr Forrest purchased an additional 5.2 million shares, at a cost of more than $3.6 million, between 17 September and 23 September. According to Bloomberg, Mr Forrest now owns 32.78% of the company.

Mr Forrest received more than $100 million in dividends recently, thanks to the company declaring a better than expected dividend of cents per share.

The move comes as legendary hedge fund manager Jim Chanos announced that he was shorting Fortescue shares, despite a strong recovery in the iron ore miner’s share price over the past six months. Fortescue shares have climbed more than 21% since March 2013, while the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up just 5.2%.

Prices for iron ore have stayed fairly steady at around US$130 a tonne, despite analyst predictions of a crash down to around US$70 a tonne. On that basis, Fortescue should report strong revenues, profits and cash flow in the 2014 financial year, as it ramps up production to 155 million tonnes annually. And the company will need to generate continued strong cash flow to repay debts of around US$10 billion.

Strong Chinese demand for iron ore is supporting the commodity price, although expectations are that over the longer term, iron ore prices will fall to around US$100 a tonne as demand tapers off. Prices could also fall if a surge in new supply comes on stream, as the iron ore giants BHP Billiton (ASX: BHP), Vale and Rio Tinto (ASX: RIO) ramp up production.

Foolish takeaway

Clearly, Mr Forrest believes there are no dark clouds on the horizon for Fortescue, hence the purchase of stock, and he could add even more shares to his holding in the weeks ahead.

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

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