tag:blogger.com,1999:blog-4815867514277794362.post6318532591039722993..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: How business decisions are made in a boom: Fortescue Metals editionJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger20125tag:blogger.com,1999:blog-4815867514277794362.post-71745692408350005912015-12-09T01:06:45.307+11:002015-12-09T01:06:45.307+11:00Guess that Alderon short worked out okGuess that Alderon short worked out okAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-43239762662860424542012-09-01T12:18:46.439+10:002012-09-01T12:18:46.439+10:00So I see this graph.... http://www.indexmundi.com...So I see this graph.... http://www.indexmundi.com/commodities/?commodity=iron-ore&months=240<br /><br />Basically looks like a bubble. $50 per ton?Brooksnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49259990509123270292012-08-31T11:25:07.203+10:002012-08-31T11:25:07.203+10:00Time to revisit this one? Iron ore price now US~$...Time to revisit this one? Iron ore price now US~$90 and Mr. F is buying his own shares hand over fist....<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35990186956450670852012-06-13T04:44:42.496+10:002012-06-13T04:44:42.496+10:00Grandich throws down the gauntlet..
http://www.gra...Grandich throws down the gauntlet..<br />http://www.grandich.com/2012/06/grandich-client-alderon-iron-ore-5/Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-19227711221760749202012-06-12T06:58:25.893+10:002012-06-12T06:58:25.893+10:00You forgot Vale, the Brazilian giant who completes...You forgot Vale, the Brazilian giant who completes the iron ore control party. Iron ore is a very profitable commodity, and has been for many years before china demand erupted, because the 3 of them (BHP, Rio, Vale) control ~70% of the traded iron ore market. LVMH does not share joint control the luxury goods market to anything like a similar extent. <br /><br />Iron ore was a great business turned into a fantastic one by Chinese demand. Steel, on the other hand, has been a lousy business temporarily turned into a good one by the same. <br /><br />Nonetheless, the concerns on China fixed asset investment excesses are legit. <br /><br />When steel turns down, the big 3 will reduce output, and earn [much] less. When steel turns down, a lot of steel capacity will simply go bankrupt. <br /> <br />Big difference.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44773992960466704052012-06-08T16:03:16.454+10:002012-06-08T16:03:16.454+10:00Amazing BHP figures you point out yes, and yet the...Amazing BHP figures you point out yes, and yet the stock has STILL not done anything for 6 years!! Great if you picked the peaks and troughs, but any long term investor in 'The Big Australian' should be taking Kloppers out into the street and 'you know what'. The dividend is rubbish as well. In comparison, I see LMVH stock has appreciated 50% since mid-2006. Why do analysts still slap a buy on BHP. Why?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-45775141502562717272012-06-07T02:09:22.288+10:002012-06-07T02:09:22.288+10:00Would iron prices decline if there started to be a...Would iron prices decline if there started to be a strong global economic recovery? My own outlook is that the world economy won't change much over the next few years (or change for the worse, even), so this logic makes sense to me. But if the economy were to improve, wouldn't Fortescue be very reasonable in assuming constant iron prices? Or at least prices above $100?<br />A more likely reason for iron prices to drop, as I see it, is that the new production/mining that everyone is building comes online at the same time.Eric Titusnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-60611378379137204682012-06-06T01:45:46.375+10:002012-06-06T01:45:46.375+10:00Hello,
First time on this blog, great information...Hello,<br /><br />First time on this blog, great information.<br /><br />A question to the Anonymous commentator "Long time blog subscriber".<br /><br />Where can I get the report Citi Group report you referred to: <br /><br />"constructed by Citi group in a recent 140 page report they released."<br /><br />Many thanks,<br />BarakBaraknoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-1924722159978979022012-06-05T15:15:52.134+10:002012-06-05T15:15:52.134+10:00You state:
"Some very dicey mines are gettin...You state:<br /><br />"Some very dicey mines are getting funding (for example Alderon financed by Liberty Mutual who are going to waste their policy-holder funds)*."<br /><br />1) Liberty Mutual is a Fortune 100 company with over $100b in assets. Their total investment in Alderon is around $53 million. I wouldnt be too critical of that investment in the context of their overall portfolio. If you believe that was a bad investment, then what did you think when Cliffs paid $4.9 billion for Consolidated Thompson? (Cliffs has total assets of ~$14b.) Consolidated Thompson is right next door to Alderon and has a very similar cost structure/development schedule. Why wouldn't you prefer to short Cliffs? (In fact there are operational issues right now that are keeping costs well above $60/ton). <br /><br />2) But, if Consolidated Thompson was able to be developed into an operating mine (in the middle of the 08-09 crisis no less), what is it about Alderon that is different? What specific factor(s) would distinguish Alderon from Consolidated Thompson and lead you to believe that it is "silly?" The Consolidated Thompson mine does have its cost/operational problems, but it is producing iron ore, and someone did pay $4.9b for it.<br /><br />I would estimate the probability that Alderon becomes an operating mine as significantly above 0.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-37346064361504988272012-06-05T06:48:35.987+10:002012-06-05T06:48:35.987+10:00From Andy Xie's latest:
"Properties unde...From Andy Xie's latest:<br /><br />"Properties under construction, sold vacant properties and the inventories of commodities like steel and non-ferrous metals may exceed 100 percent of GDP at current market value. The rising inventories have exaggerated the country's economic growth in the past five years."<br />http://english.caixin.com/2012-06-04/100396776.html<br /><br />Michael Petis wrote a few months ago that the Chinese government could keep this going for another 2 or 3 years. Who knows. In any case with the political fallout the limits are now visible to all.<br /><br />John: Have you any new thoughts on the Chinese solar PV industry? Do you think they have the time or capacity to decrease prices sufficiently for demand to takeoff without government subsidies for purchasers of energy? Is 2 or 3 years enough or are the walls all closing in?Davidhttps://www.blogger.com/profile/06795770392922614367noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-83832475924255636362012-06-05T03:25:12.937+10:002012-06-05T03:25:12.937+10:00Somewhat less than my two cents' worth below, ...Somewhat less than my two cents' worth below, but the internet gives everyone a voice, so...<br /><br />Timing a cyclical turn is almost impossible, but escaping cyclicality removes the "almost" from the phrase. High margins beget new entrants, which begets overproduction, which begets a price crash. This is the internal dynamic, quite separate from the external dynamic of demand, which also seems to be heading toward a turn (but has seemed so for a while and may well persist longer than seems remotely rational). <br /><br />The notion that iron ore is rare and thus we're in a "new era" elides the fact that what's really rare are massive deposits of 65% purity in fairly convenient geologies and locations with established infrastructure. And the idea that higher costs for most/all will keep high-cost producers afloat strikes me as bizarre and backwards. Since so much is sunk into a mine upfront (at least a mine like Northern Millennium's, or Alderon's, or even Northland's), even if ore can be produced at a profit that "profit" goes to service debt. Either things get so bad that this is no longer the case--in which case big marginal mines shut down--or else the marginal mines stay open and prolong all miners' misery.<br /><br />One final note on the demand side: steel gets recycled. Initial massive demand for ore accompanies urbanization, but once infrastructure's in place a fair amount gets melted down and reformed, which also reduces demand for ore. Of course, we can say that India is ramping, and behind it Africa, along with healthy growth in mid-income countries/continents. They probably will provide the next booms. <br /><br />But without bust, there's no boom (which only sounds like a strip club tagline).Aharon Lnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-15285984325614686642012-06-05T02:48:46.675+10:002012-06-05T02:48:46.675+10:00The biggest reason I've stayed not bearish on ...The biggest reason I've stayed not bearish on iron ore is the simple fact that the people that know their country/economy best, the Chinese govt., continue to pour money into iron ore projects (eg. the recent Alderon agreement). Are they just thinking long-term, 5+ years, and we're thinking 1-3? You'd think that they would be studying the global iron market at least as much as anyone and they obviously have the best information about the demand side. You'd also think they could set up a massive, concerted, one year or so iron price decline and pick up the Canadian projects and Fortescue for nothing, essentially. Why don't they do that if the market is so weak (or will be weak)? You're essentially betting against the Chinese here, the market participant that has an extremely asymmetric information advantage, which in the short-term, I'm inclined to do as well, but definitely not 3+ years out.John Allennoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-87188835192738764392012-06-05T01:18:38.127+10:002012-06-05T01:18:38.127+10:00How much capital does Bronte Capital actually mana...How much capital does Bronte Capital actually manage? Liberty Metals & Mining is the investment arm of a Fortune 100 company, and Hebei Iron and Steel is the world's 2nd largest steelmaker. Both Liberty and Hebei are investing about $450 million in ADV. Let's see how that short looks a year from now.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-71999900589166759352012-06-04T23:59:54.773+10:002012-06-04T23:59:54.773+10:00Make hay while the sun shines. Lots and lots of h...Make hay while the sun shines. Lots and lots of hay.<br /><br />It is amazing how many businesses I look at these days and conclude, "it's probably going to near-zero, but slowly enough that you'll pull 2x your investment out of it before it gets there."<br /><br />But those are usually businesses whose costs are already sunk and whose balance sheet is a given, not ones who are newly deciding to raise $5b and go to Macau and put it all on "black." If I were running Fortescue I would never take on the risk they have.<br /><br />The question remains: If you assume iron ore prices over the next 5 years go $110 $100 $90 $80 $70 and they hit their production targets, (or choose your own different decline curve), how much debt have they paid off by then? Might not whatever realistic base case you assume be a decent bet, even if the price-collapse scenario is disasterous?Robert in Chicagonoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-2015329596339485092012-06-04T21:13:58.785+10:002012-06-04T21:13:58.785+10:00The iron ore prices recovered quickly to above $10...The iron ore prices recovered quickly to above $100 because that is supposedly where the marginal cost of Chinese domestic production is. Domestic Chinese production costs are v opaque for all commodities so not sure how accurate that is.<br /><br />I think what is missing is a look at the cost curve rather than margin comparisons between sectors.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-22129220668503759552012-06-04T20:23:58.531+10:002012-06-04T20:23:58.531+10:00Hi John. Long time blog subscriber, my first (some...Hi John. Long time blog subscriber, my first (somewhat random) comments.<br /><br />1/ Here is a cost curve constructed by Citi group in a recent 140 page report they released. Citi purport to cover 80% of current supply and 90% of new projects under their coverage / in their cost curve.<br /><br />http://ge.tt/1jsMYcI/v/0?c<br /><br />The consensus analysis of the iron ore cost curve is that the marginal producers are expensive Chinese mines where iron ore grades have been declining for some time now. Citi have Chinese domestic head grades at 19% Fe. I recall other charts which show lower.<br /><br />2/ In analysis of iron ore operating costs, it is common to overlook sustaining capex. For FMG, this adds up to ~$6/t in cash costs. FMG also frequently quote in wet metric tonne. I recall they have a moisture of around 10% which is why (along with lower grade) their revenue / t always seems lower than BHP / RIO. High FMG opex vs BHP/Rio is predominantly from high strip ratios (rising recently) and that their ore is below the water table. On expansion, FMG say their opex / t will go down from current levels.<br /><br />3/ It is worth nothing that FMG in their ~100Mtpa expansion are doing it on a capex intensity of approximately $100/t annual capacity (after inclusion of finance lease items into capital costs). BHP's Port Hedland Outer Harbour expansion (if approved) will be around $200/t annual capacity all-in for capex intensity.<br /><br />- P TimeAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-75019936805993391832012-06-04T17:53:18.864+10:002012-06-04T17:53:18.864+10:00All this talk about the iron price and no Game of ...All this talk about the iron price and no Game of Thrones reference? You are losing nerd points John.<br /><br />Interesting take on ebit margins and how they show possible signs of excessive ore prices. I have no idea how to properly value commodity prices...wonder if there is a way to guesstimate the price if demand falls greatly...<br /><br />Nev Power interview was hard to watch. He seemed a bit too uncomfortable talking about low iron ore prices. Alan Kohler did a great job.<br /><br />Construction in Taiwan seems to slowing down a bit. News here is predicting a slow down in housing prices which is also reinforcing the lack of demand. I'd imagine Fortescue is a short Chanos has in his overall China short.<br /><br />Are you shorting Fortescue via US pinks so you short with the USD? (not sure if this even possible) or do you short in the ASX and convert currency? You said you are down the AUD so I imagine you are doing something like this.<br /><br />Good luck on the trade.Joshua Wallishttps://www.blogger.com/profile/16147838003431656851noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-52105718704547944902012-06-04T15:59:06.736+10:002012-06-04T15:59:06.736+10:00The end price of iron ore is going to depend on gl...The end price of iron ore is going to depend on global cost curves... I do not know the shape of cost curves but it seems unlikely to me that iron ore will remain as profitable on a cost-of-goods-sold basis <br /><br />Hi John, sorry if this is a repeat (computer issues) but I had 2 comments:<br /><br />1/ How would you be able to say definitely the US$110 that FMG say the LT price should be is unreasonable without knowing the cost curve? Maybe it is US$140 for all we know (and I don't)<br /><br />2/ Don't think it is fair to compare BHP's margins with LVMH as the latter's business can be competed away by free enterprise (e.g. a competitor can come up with better branding, design etc). In BHP's case though, it is really who sought out and monopolised the best tenements first. It is highly unlikely that US$20 - US$30 / tonne cost iron ore is likely to be easily found (case in point, people are financing marginal projects like Alderon). Hence, the margins that BHP enjoy are were more a function of them being lucky enough to be one of the first to the party (some parallels with the lucky sperm club actually).ermennoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-12802957699804832852012-06-04T14:55:46.092+10:002012-06-04T14:55:46.092+10:00I'm bearish on iron price, Aussie dollar and t...I'm bearish on iron price, Aussie dollar and the Australian economy in general. However, it looks like the policy makers in China are prepared to kick the can further down the road with more rounds of stimulus package. <br /><br />Btw, I'd rather buy msft at ~10x FCF for a similar 40% operating margin. We are at the point of the upgrade cycles that there will more tailwind than headwind. I just find msft's price silly... Sorry, I digress...Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-14914944476659423372012-06-04T14:17:14.745+10:002012-06-04T14:17:14.745+10:00Meanwhile, in China...
Ore pile mounts as demand ...Meanwhile, in China...<br /><br />Ore pile mounts as demand falls<br />http://www.smh.com.au/business/chinas-iron-ore-pile-mounts-as-demand-falls-20120603-1zq5h.htmlCurmudgeonlyTrollhttps://www.blogger.com/profile/02004282752334460717noreply@blogger.com