Not Time To Buy Fortescue, Yet

This story features FORTESCUE LIMITED. For more info SHARE ANALYSIS: FMG

Bottom Line 18/03/15

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support Levels: $1.69 / $1.16
Resistence Levels: $2.76 / $3.86 / $5.03

Technical Discussion

Fortescue Metals ((FMG)) is an Iron Ore producer and explorer operational in the Pilbara region of Western Australia. It is engaged in mining of iron ore from its Cloudbreak and Christmas Creek mine sites. Its Cloudbreak mine site is located in the Chichester Ranges in the Pilbara region of Western Australia which is 263 kilometres south of Port Hedland and 150km north of Newman. Its Christmas Creek is the second mining operation, 50 km to the east of Cloudbreak. The Company has also designed and constructed rail and port facilities to support the development and sale of the Pilbara’s stranded iron ore bodies. For the year ending the 30th of June 2014 revenues increased 45% to $11.75B. Net income increased 56% to $2.73B.  Broker/Analyst consensus is currently “Sell”.  The dividend yield is 12.9%.

Reasons to remain cautious:
? The price of Iron Ore remains a drag on the share price.
? No dividend is expected in 2015.
? The company isn’t expected to be profitable in FY16 or FY 17.
? Net debt at the end is FY 14 was US$7.2bn which came in under estimates.
? A line of support has been smashed.

There was some reason to be slightly more optimistic during our last review with a Head & Shoulders pattern appearing to be working to a conclusion.  Like any pattern though it needs to trigger before becoming significant which in this instance meant the neckline had to be penetrated before thinking in terms of a decent trend unfolding.  However, we didn’t get anywhere near to penetrating that bullish trigger point with the downtrend continuing unabated over the past few weeks.  In fact price is once again in freefall putting paid to the H&S pattern which is well and truly invalidated. 

To a large extent the problem remains the price of iron ore which continues to be under severe pressure.  Concerns regarding China’s growth prospects remain at the forefront of analysts’ minds although this has been well documented before.  Adding insult to injury is the fact that the major low cost producers like BHP have been cranking up production which obviously isn’t going to help matters in the slightest.  The issue with Fortescue is that it’s more or less a one trick pony and whilst the price of iron ore remains under pressure there is no light at the end of the tunnel – at least not yet.  From a technical standpoint the picture has deteriorated over the past few weeks although tonight we’ll concentrate on the weekly chart to try and gain some clarity. 

Over the past few months we’ve had the wave equality projection in position at $1.69 although ideally we didn’t want those lows to be tagged.  However, having seen the severity of the retracement over the past few weeks that lower target area is likely going to be visited.  Ideally those lower levels will hold though it’s by no means a foregone conclusion having seen what’s gone before.  At least it provides us with a target area to concentrate on, but at the end of the day buyers need to step up to the plate in numbers at those lower levels if a significant low is going to be locked in.  The risk for the moment is to the downside.

Trading Strategy

Yesterday’s announcement from the company stating that it had abandoned its plans to refinance $US2.5 billion worth of debt wasn’t taken well by the market.  Apparently the bond market has proven to be too expensive which likely means the company is going to look elsewhere for more favourable terms.  It could be that FMG looks closer to home; perhaps looking at major banks as a possible alternative for the refinancing.  Be that as it may, for the moment it’s best to give Fortescue a wide berth from a trading point of view although we’ll be vigilant for buyers returning at the wave equality projection circa $1.69 as mentioned above.
 

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