Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

We believe the time has come to take money off the table for <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> as iron ore prices are likely to correct sharply in the near-term. From its peak of 174$/ton, iron ore prices have corrected nearly 13% and are now at 151$/ton. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/186/102/original/image_51647481031612174374116.png?1612174374" class="editor-image img-responsive" data-smartkarma-image-id="186102"></figure>Source: SGX, BloombergWhile the company's results have been excellent, and its balance sheet is in great shape, and on spot prices, the company is very cheap at 3.4x EV-EBITDA FY21. <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> share price will trade with iron ore prices as the correlation there is very strong.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/186/104/original/image_18778125341612175002564.png?1612175003" class="editor-image img-responsive" data-smartkarma-image-id="186104"></figure>Source: SGX, BloombergWe think taking money off the table and waiting for the dust to settle on iron ore prices will be a good approach to playing <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a>. We see iron ore prices dip to the 120-130$/ton levels in the short-term.

We believe the time has come to take money off the table for Fortescue Metals (FMG AU) as iron ore prices are likely to correct sharply in the near-term. From its peak of 174$/ton, iron ore prices have corrected nearly 13% and are now at 151$/ton. Source: SGX, BloombergWhile the company's results have been excellent, and its balance sheet is in great shape, and on spot prices, the company is very cheap at 3.4x EV-EBITDA FY21. Fortescue Metals (FMG AU) share price will trade with iron ore prices as the correlation there is very strong.Source: SGX, BloombergWe think taking money off the table and waiting for the dust to settle on iron ore prices will be a good approach to playing Fortescue Metals (FMG AU). We see iron ore prices dip to the 120-130$/ton levels in the short-term.

Managing Director

Elan Gore

TMI Data Science

TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade & traditional media.  Our proprietary software, TMI Machine, is a text-mining platform designed with the buy-side & capital markets professional in mind, text-mining the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income & individual equities.  TMI provides custom leading indicators and systematic trading strategies, operating at the nexus of linguistics & statistics drawing on vast experience in investment banking and hedge fund settings in senior quantitative and fundamental roles.  

TMI Data Science was founded by Elan Gore, an award-winning Senior Global Basic Materials Equity Analyst & China Economist with 15 years of experience in North American hedge funds & institutional managers; and Alessandro Porrino, Ph.D., an Algorithmic Trading Analyst and Programmer with 10 years of front-office experience ranging from complex FX option pricing to auto-hedging strategies at Bank of America Merrill Lynch and Standard Chartered.  Mr. Gore holds an MBA in Finance from New York University Stern School of Business, and Mr. Porrino holds a Ph.D. in Systems Engineering from Brunel University London.

Cross Asset Strategy

<ul>
<li>Last month our text-mined indicators pointed to a year-end surge in raw materials restocking coupled with an extraordinary spike in general reporting on price increases globally</li>
<li>With a seasonal slowdown ahead of the Lunar New Year holiday and mobility restrictions, the restocking has faded; buildups in iron ore, steel and zinc inventories confirm a pause in momentum</li>
<li>Despite crowded positioning, copper maintained low beta to mining equities with a single-digit correction vs. the equities correcting closer to -10%; so far both remain near 50DMAs</li>
<li>Our text-mined copper sentiment indicator peaked at a multi-year high of +4.2x STDEVs on January 2, pulling back in recent weeks closer to neutral readings; however sharp, attribution finds the pullback is still primarily associated with pre-LNY seasonal slowdown and the relatively firm USD (as conviction levels on structural copper tightness remain high amid lean inventories)</li>
<li>Lithium sentiment stands out in the YTD, improving to +2x STDEVs on the lithium carbonate spot recovery and improving EV data points</li>
<li>Iron ore and steel diffusion indices have been dropping sharply in the YTD on falling utilization, building inventories and compressing mill margins, finally down to outright negative territory on first signs of vol in iron ore this week</li>
</ul><div class="content-highlight">TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade &amp; traditional media. Our proprietary tool text-mines the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income &amp; individual equities. </div>


Last month our text-mined indicators pointed to a year-end surge in raw materials restocking coupled with an extraordinary spike in general reporting on price increases globally
With a seasonal slowdown ahead of the Lunar New Year holiday and mobility restrictions, the restocking has faded; buildups in iron ore, steel and zinc inventories confirm a pause in momentum
Despite crowded positioning, copper maintained low beta to mining equities with a single-digit correction vs. the equities correcting closer to -10%; so far both remain near 50DMAs
Our text-mined copper sentiment indicator peaked at a multi-year high of +4.2x STDEVs on January 2, pulling back in recent weeks closer to neutral readings; however sharp, attribution finds the pullback is still primarily associated with pre-LNY seasonal slowdown and the relatively firm USD (as conviction levels on structural copper tightness remain high amid lean inventories)
Lithium sentiment stands out in the YTD, improving to +2x STDEVs on the lithium carbonate spot recovery and improving EV data points
Iron ore and steel diffusion indices have been dropping sharply in the YTD on falling utilization, building inventories and compressing mill margins, finally down to outright negative territory on first signs of vol in iron ore this week
TMI Data Science utilizes Natural Language Processing to build custom leading indicators using unstructured data sourced from the global financial, trade &amp; traditional media. Our proprietary tool text-mines the global media to discern and quantify nuanced qualitative shifts in press coverage as they apply to macroeconomics, equity indexes/ETFs, commodities, currencies, fixed income &amp; individual equities. 

TMI Snapshot:  Metals Points - Restocking Pauses, Copper Sentiment Pulls Back from Extremes

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

The number of major country indexes showing major bullish inflections continues to grow. Broad commodities (Bloomberg Commodity index) also display a bullish reversal topside a 12.5-year downtrend. This type of evidence helps affirm our bullish outlook and suggests higher prices are ahead. Continue to add exposure on pullbacks.

The number of major country indexes showing major bullish inflections continues to grow. Broad commodities (Bloomberg Commodity index) also display a bullish reversal topside a 12.5-year downtrend. This type of evidence helps affirm our bullish outlook and suggests higher prices are ahead. Continue to add exposure on pullbacks.

Long-Term Bullish Inflections For Hang Seng, DAX, MSCI EM, & Bloomberg Commodity Index

The ascent of the iron ore price was temporarily halted by rhetoric from the Chinese government.  Two key incidents that spooked the market were:<ul>
<li>The Dalian Commodity Exchange ( DCE) capped the trading volumes on the 21st of December for non-brokerage trading participants. The DCE tightened its limits on opening futures positions to 2,000 lots a day for non-brokerage traders from the 22nd of December – further reducing it from a limit of 5,000 lots imposed on December 9, just six days after limits were set at 10,000 lots.</li>
<li>The sentiment was further dampened due to the MIIT (Ministry of Industry and Information Technology) calling on the steel sector to “resolutely” cut crude steel output and ensure an annual drop in 2021.</li>
</ul>We believe that fundamental data and liquidity will be the key factors in deciding the iron ore price direction, so the iron ore price has not been badly affected by this newsflow.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/181/205/original/image_28844845831609973883598.png?1609973887" class="editor-image img-responsive" data-smartkarma-image-id="181205"></figure>Source: SGX, Bloomberg<a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a>  continues to be our best play in the iron ore space and commands an upside of another 25-30% in the near term as the market continues to digest higher iron ore prices for the near-term. In our insight, on the 4th of December 2020, <a href="https://www.smartkarma.com/insights/fortescue-metals-more-upside-in-the-near-term" target="_blank" data-smartkarma-citation="insights:46020" rel="noopener">Fortescue Metals: More Upside In the Near Term</a>, we elaborate on our rationale for being long. At 140$/ton iron ore price ( Vs. current prices of 165$/ton), Fortescue has a 12% FCF yield. We believe that there could at least be a 10% dividend yield for shareholders.  If iron ore prices hold at 165$/ton spot for longer, the free cash flow yield increases to 15.5%!The risk to our call is :<ol>
<li>Sudden and drastic tightening by the Chinese economy on its property and infrastructure sectors.</li>
<li>The coronavirus resulting in increased lockdowns stalling global steel production from improving.</li>
</ol>You can refer to <a href="https://www.smartkarma.com/insights/fortescue-metals-15-dividend-yield-buybacks-china-stimulus" target="_blank" data-smartkarma-citation="insights:37317" rel="noopener">Fortescue Metals 15% Dividend Yield/Buybacks + China Stimulus</a>, <a href="https://www.smartkarma.com/insights/fortescue-metals-group-slight-hiccup-from-china-but-thesis-intact" target="_blank" data-smartkarma-citation="insights:43782" rel="noopener">Fortescue Metals Group: Slight Hiccup from China but Thesis Intact</a>, <a href="https://www.smartkarma.com/insights/fortescue-metals-iron-ore-stronger-for-longer" target="_blank" data-smartkarma-citation="insights:43095" rel="noopener">Fortescue Metals: Iron Ore Stronger for Longer</a> for more information.

The ascent of the iron ore price was temporarily halted by rhetoric from the Chinese government.  Two key incidents that spooked the market were:
The Dalian Commodity Exchange ( DCE) capped the trading volumes on the 21st of December for non-brokerage trading participants. The DCE tightened its limits on opening futures positions to 2,000 lots a day for non-brokerage traders from the 22nd of December – further reducing it from a limit of 5,000 lots imposed on December 9, just six days after limits were set at 10,000 lots.
The sentiment was further dampened due to the MIIT (Ministry of Industry and Information Technology) calling on the steel sector to “resolutely” cut crude steel output and ensure an annual drop in 2021.
We believe that fundamental data and liquidity will be the key factors in deciding the iron ore price direction, so the iron ore price has not been badly affected by this newsflow.Source: SGX, BloombergFortescue Metals (FMG AU)  continues to be our best play in the iron ore space and commands an upside of another 25-30% in the near term as the market continues to digest higher iron ore prices for the near-term. In our insight, on the 4th of December 2020, Fortescue Metals: More Upside In the Near Term, we elaborate on our rationale for being long. At 140$/ton iron ore price ( Vs. current prices of 165$/ton), Fortescue has a 12% FCF yield. We believe that there could at least be a 10% dividend yield for shareholders.  If iron ore prices hold at 165$/ton spot for longer, the free cash flow yield increases to 15.5%!The risk to our call is :
Sudden and drastic tightening by the Chinese economy on its property and infrastructure sectors.
The coronavirus resulting in increased lockdowns stalling global steel production from improving.
You can refer to Fortescue Metals 15% Dividend Yield/Buybacks + China Stimulus, Fortescue Metals Group: Slight Hiccup from China but Thesis Intact, Fortescue Metals: Iron Ore Stronger for Longer for more information.

We believe that iron ore prices will stay stronger for longer as <a href="https://www.smartkarma.com/entities/vale-sa" target="_blank" data-smartkarma-citation="entities:23731:1" rel="noopener">Vale SA (VALE US)</a>, in its most recent regulatory filing, guided its production volumes down to 305-310 million tons for FY20 and 315-335 million tons for FY21. 
Most of the sell-side and the market were assuming sales of 360 million tons for FY21. Market participants will have to bring supply estimates down by 25-45 million tons for FY21. 
<h3>Vale Output Summary </h3>
<table class="table table-striped">
<tbody>
<tr>
<td style="text-align: center; width: 128.444px;">2017</td>
<td style="text-align: center; width: 128.444px;">2018</td>
<td style="text-align: center; width: 128.444px;">2019</td>
<td style="text-align: center; width: 128.444px;">2020e</td>
<td style="text-align: center; width: 126.667px;">2021e</td>
</tr>
<tr>
<td style="text-align: center; width: 128.444px;">366</td>
<td style="text-align: center; width: 128.444px;">385</td>
<td style="text-align: center; width: 128.444px;">302</td>
<td style="text-align: center; width: 128.444px;">305-310</td>
<td style="text-align: center; width: 126.667px;">315-335</td>
</tr>
</tbody>
</table>
source: company filings and presentations
We believe this guide down in sales for 2021 is substantial and will benefit iron ore prices in the short-term as Vale's shipments are almost 16-17% of the seaborne market. 
Based on spot prices of 120-140$/ton, <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a> trades at an 11-15% FCF yield.  The company pays out its cash generated as dividends.  
This catalyst and cheap FCF yield indicate a short term upside of at least 20-30%.

We believe that iron ore prices will stay stronger for longer as Vale SA (VALE US), in its most recent regulatory filing, guided its production volumes down to 305-310 million tons for FY20 and 315-335 million tons for FY21. 
Most of the sell-side and the market were assuming sales of 360 million tons for FY21. Market participants will have to bring supply estimates down by 25-45 million tons for FY21. 
Vale Output Summary 



2017
2018
2019
2020e
2021e


366
385
302
305-310
315-335



source: company filings and presentations
We believe this guide down in sales for 2021 is substantial and will benefit iron ore prices in the short-term as Vale's shipments are almost 16-17% of the seaborne market. 
Based on spot prices of 120-140$/ton, Fortescue Metals (FMG AU) trades at an 11-15% FCF yield.  The company pays out its cash generated as dividends.  
This catalyst and cheap FCF yield indicate a short term upside of at least 20-30%.

Fortescue Metals: More Upside In the Near Term

Australia

Fortescue Metals Group Ltd. explores for and produces iron ore. The Company conducts business worldwide.

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Fortescue Metals (FMG AU)

Fortescue: Take Money off the Table

This insight elaborates on why taking money off the table on Fortescue metals is prudent. It also provides a short-term view of the iron ore price...

Sameer Taneja

TMI Snapshot: Metals Points - Restocking Pauses, Copper Sentiment Pulls Back from Extremes

The year-end restocking trade has faded into the Lunar New Year, dragging on the reflation trade. Lithium sentiment is the only standout this...

Elan Gore

Long-Term Bullish Inflections For Hang Seng, DAX, MSCI EM, & Bloomberg Commodity Index

The number of major country indexes showing major bullish inflections continues to grow. Broad commodities also breaking a 12.5-year downtrend....

Vermilion Research

Fortescue: Stay for More Upside

This insight provides a positive directional view on Fortescue based on iron ore prices being stronger for longer. With a free cash flow yield of...

Sameer Taneja

Fortescue Metals: More Upside In the Near Term

Fortescue is a pure-play with a high correlation to the iron ore price. With iron ore in a 120-140$/ton range, the stock has an FCF yield of 11-15%...

Sameer Taneja

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