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

<p>With the recent correction in iron ore stocks due to the Tangshan steel production cuts negative sentiment, we believe better risk-reward has emerged in the name. Iron ore prices have retraced, and we believe that an attractive risk-reward is beginning to emerge 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> once again. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/199/068/original/image?1617686026" class="editor-image img-responsive" data-smartkarma-image-id="199068"></figure><p><em>Source: SGX, Bloomberg</em></p><h3>Key thesis for investment in the company </h3><ul>
<li>
<strong>Attractive FCF yields and dividend yields at current spot prices:</strong> At the current spot price of 160$/ton, the FCF yield is close to 18%, and the dividend yield is 14%.  If prices were to decline to 120$/ton,  we would still see FCF yields of 10% and dividend yields of 9%.</li>
<li>
<strong>Chinese steel production growth continues to be strong despite Tangshan cuts. We forecast 10%</strong> steel production growth in March. The economy also reported strong numbers with a manufacturing PMI of 51.9 (Vs. Consensus estimates of 51.2). </li>
<li>
<strong>Risks on the supply of iron ore from Brazil could emerge</strong> as the Covid impact worsens.</li>
</ul><h3>Key Risks</h3><ul>
<li> <strong>China Tightening: </strong>A scenario could arise where China tightens the economy. This will be visible in the credit-balance growth slowing and the TSF coming down given last year was a high base in March. Consensus expectations for TSF are 3.8 trillion RMB for March ( Vs. 5.2 trillion RMB in March 2020). A lower number than 3.8 trillion could impact the market sentiment and send the iron ore price lower.</li>
<li>
<strong>Production cuts like the ones in Tangshan</strong> extending into other regions.</li>
</ul>

With the recent correction in iron ore stocks due to the Tangshan steel production cuts negative sentiment, we believe better risk-reward has emerged in the name. Iron ore prices have retraced, and we believe that an attractive risk-reward is beginning to emerge for Fortescue Metals (FMG AU) once again. Source: SGX, BloombergKey thesis for investment in the company 

Attractive FCF yields and dividend yields at current spot prices: At the current spot price of 160$/ton, the FCF yield is close to 18%, and the dividend yield is 14%.  If prices were to decline to 120$/ton,  we would still see FCF yields of 10% and dividend yields of 9%.

Chinese steel production growth continues to be strong despite Tangshan cuts. We forecast 10% steel production growth in March. The economy also reported strong numbers with a manufacturing PMI of 51.9 (Vs. Consensus estimates of 51.2). 

Risks on the supply of iron ore from Brazil could emerge as the Covid impact worsens.
Key Risks
 China Tightening: A scenario could arise where China tightens the economy. This will be visible in the credit-balance growth slowing and the TSF coming down given last year was a high base in March. Consensus expectations for TSF are 3.8 trillion RMB for March ( Vs. 5.2 trillion RMB in March 2020). A lower number than 3.8 trillion could impact the market sentiment and send the iron ore price lower.

Production cuts like the ones in Tangshan extending into other regions.


Fortescue Short-Term Better Risk Reward Emerging

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

<p>As long as market dynamics remain largely positive and the MSCI ACWI (ACWI-US), ACWI ex-US (ACWX-US), and EM (EEM-US) indexes are above their respective intermediate-term support levels we believe a constructive outlook is warranted. To reiterate, support levels to watch include $90 on ACWI-US, $53 on ACWX-US, and $52 on EEM-US. Open the attached file to read our complete International Strategy document, and to find links to detailed comments and recommendations for each of our 12 Sectors.</p>

As long as market dynamics remain largely positive and the MSCI ACWI (ACWI-US), ACWI ex-US (ACWX-US), and EM (EEM-US) indexes are above their respective intermediate-term support levels we believe a constructive outlook is warranted. To reiterate, support levels to watch include $90 on ACWI-US, $53 on ACWX-US, and $52 on EEM-US. Open the attached file to read our complete International Strategy document, and to find links to detailed comments and recommendations for each of our 12 Sectors.

Global Equity Strategy: Constructive Pullback; Overweight Value

<p>After having gone ex-dividend, <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> now presents a short-term opportunity. Last month due to its strong results, it declared a fully franked interim dividend of $1.47 per share, up a massive 93.4% on the prior corresponding period. Based on the Fortescue share price at Friday’s close, this interim dividend represents a 6% yield. </p><p>We think Fortescue presents an opportunity for a quick trade, given that iron ore prices are likely to hold for the short-term due to:</p><ul>
<li>Supply Issues out of Australia.</li>
<li>Mill Margins in China inflecting into positive territory.</li>
<li>Steel production levels are recovering in countries ex-China, for example, India and Brazil.</li>
</ul><p>With iron ore prices hovering at 160$-170$/ton, Fortescue can potentially achieve free cash flows of 16-18% and dividend yields of 13-14%, assuming 60% payout ratios.</p><table class="table table-striped">
<colgroup>
<col>
<col>
<col>
<col>
</colgroup>
<tbody>
<tr>
<td style="width: 42pt;">Ore Px USD/ton</td>
<td style="width: 50pt;">Div Yield (%)</td>
<td style="width: 57pt;">FCF Yield (%)</td>
<td style="width: 44pt;">EV-EBITDA</td>
</tr>
<tr>
<td>60</td>
<td>2%</td>
<td>-1%</td>
<td>22.0</td>
</tr>
<tr>
<td>70</td>
<td>3%</td>
<td>1%</td>
<td>16.7</td>
</tr>
<tr>
<td>80</td>
<td>4%</td>
<td>3%</td>
<td>13.4</td>
</tr>
<tr>
<td>90</td>
<td>5%</td>
<td>4%</td>
<td>11.2</td>
</tr>
<tr>
<td>100</td>
<td>6%</td>
<td>6%</td>
<td>9.6</td>
</tr>
<tr>
<td>110</td>
<td>7%</td>
<td>8%</td>
<td>8.4</td>
</tr>
<tr>
<td>120</td>
<td>8%</td>
<td>10%</td>
<td>7.5</td>
</tr>
<tr>
<td>130</td>
<td>9%</td>
<td>11%</td>
<td>6.7</td>
</tr>
<tr>
<td>140</td>
<td>10%</td>
<td>13%</td>
<td>6.1</td>
</tr>
<tr>
<td>150</td>
<td>11%</td>
<td>15%</td>
<td>5.6</td>
</tr>
<tr>
<td>160</td>
<td>13%</td>
<td>16%</td>
<td>5.1</td>
</tr>
<tr>
<td>170</td>
<td>14%</td>
<td>18%</td>
<td>4.8</td>
</tr>
</tbody>
</table><p><em>Source: Company filings, internal estimates</em></p>

After having gone ex-dividend, Fortescue Metals (FMG AU) now presents a short-term opportunity. Last month due to its strong results, it declared a fully franked interim dividend of $1.47 per share, up a massive 93.4% on the prior corresponding period. Based on the Fortescue share price at Friday’s close, this interim dividend represents a 6% yield. We think Fortescue presents an opportunity for a quick trade, given that iron ore prices are likely to hold for the short-term due to:
Supply Issues out of Australia.
Mill Margins in China inflecting into positive territory.
Steel production levels are recovering in countries ex-China, for example, India and Brazil.
With iron ore prices hovering at 160$-170$/ton, Fortescue can potentially achieve free cash flows of 16-18% and dividend yields of 13-14%, assuming 60% payout ratios.








Ore Px USD/ton
Div Yield (%)
FCF Yield (%)
EV-EBITDA


60
2%
-1%
22.0


70
3%
1%
16.7


80
4%
3%
13.4


90
5%
4%
11.2


100
6%
6%
9.6


110
7%
8%
8.4


120
8%
10%
7.5


130
9%
11%
6.7


140
10%
13%
6.1


150
11%
15%
5.6


160
13%
16%
5.1


170
14%
18%
4.8


Source: Company filings, internal estimates

Fortescue, Short-Term Upside After Going Ex-Dividend

<p>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. </p><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><p><em>Source: SGX, Bloomberg</em></p><p>While 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.</p><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><p><em>Source: SGX, Bloomberg</em></p><p>We 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.</p>

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"><p>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. </p></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

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 Short-Term Better Risk Reward Emerging

Fortescue is an attractive risk-reward opportunity with an 18% FCF yield and 14% dividend yield based on current spot prices, with a good margin of...

Sameer Taneja

Global Equity Strategy: Constructive Pullback; Overweight Value

As long as the MSCI ACWI (ACWI-US), ACWI ex-US (ACWX-US), and EM (EEM-US) indexes are above their respective intermediate-term support levels we...

Vermilion Research

Fortescue, Short-Term Upside After Going Ex-Dividend

We highlight an opportunity to trade Fortescue which at the current iron ore spot price has a 17% Free Cash Flow Yield and 14% dividend yield. We...

Sameer Taneja

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

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