Stephen Simpson, CFA
Long only, growth at reasonable price, value, research analyst

Iron's Free Fall Has Rusted Fortescue Metals

(Editor's Note: Investors should be mindful of the risks of transacting in illiquid securities such as FSUGY. Fortescue's listing in Australia, FMG.AX, offers the best liquidity.)

My bullish calls on copper producers Hudbay Minerals (NYSE:HBM), Taseko (NTGB), and First Quantum (FQFLV) have definitely worked out, but the same cannot be said of Fortescue Metals (OTCQX:FSUGY) as a roughly 30% decline in benchmark iron ore prices and wider discounts have sapped the company's earnings and cash flow leverage.

I believe Fortescue can stay free cash flow positive at or above realized prices of $70/mt, but there's a major valuation difference between "survive" and "thrive" and the behavior of Chinese steel mills is not encouraging...

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