Shares of Fortescue Metals Group (ASX:FMG) have surged on Tuesday amid speculation of Chinese investment into the company. Iron ore mining companies such as Fortescue have been struggling as global demand for the commodity has plummeted, bringing prices down with it. The underling price of FMG is trading near 7 years lows that it reached during the global financial crisis. Shares of the company have fallen even further in the recent months on speculation that iron ore prices would continue to stay at lower levels.
The Australian Financial Review has reported that China’s largest steel producer, Baesteel, has held discussions with the Australian miner about potential investment into the company. Reports have also emerged of Chinese companies applying to Australia’s Foreign Investment Review Board (FIRB). Fortescue released a statement on Tuesday claiming it does not knowing anything about the speculation. “Fortescue is not aware of FIRB applications by third parties and is in compliance with its continuous disclosure obligations," the announcement said. Analysts have noted that although China’s interest in Australian miners is likely, the investors do not necessarily have to be equity holders.
Shares of Fortescue have spiked 22.5c, or 10.37 per cent, at $2.40 per share around 12:11pm on Tuesday. Over the past 6 months, FMG has experienced significant volatility but has followed a downward trend. The speculation of Chinese investment into Fortescue has also pushed iron ore prices above the US$60 per tonne mark. Overnight, the speculation drove iron ore prices to around US$61 per tonne. Despite the ongoing speculation, Matthew Hodge of Morningstar believes Fortescue is not in the position to receive significant investment. “This is a single commodity producer without a cost advantage that's got a lot of debt, he said. "Ultimately that's unsustainable and something will have to change.”
Author: Simon Herrmann
May 26, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.