Caution Required On Fortescue

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

Bottom Line 17/11/15

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support Levels: $2.03 / $1.58 / $1.16
Resistance Levels: $2.65 – $2.75 / $3.86

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 Headland 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 2015 revenues decreased 27% to $8.57B. Net income decreased 88% to $317M. Revenues reveal the China segment decrease of 29% to $8.05B.  Broker/Analyst consensus is a comprehensive “Sell”.  The dividend yield is 2.4%.

Reasons to be more optimistic:
→ First quarter production numbers were solid.
→ Cost performance continues to improve.
→ Recent results didn’t reveal anything too sinister.
→ US$2.3bn of debt has been refinanced at 9.75% with the first payment pushed out to 2019 from 2017.
→ The company could be profitable in FY16 or FY 17.
→ Net debt at the end is FY 14 was US$7.2bn which came in under estimates.

The positive thing during our last look at Fortescue was the impulsive movement higher from the lower boundary of the basing pattern.  This is something that hasn’t been seen for a very long time, albeit we are only concentrating on the smaller degree patterns.  This means there is plenty for the company to prove over the coming weeks and months, especially before thinking in terms of something more bullish longer term unfolding.  Still, a small step in the right direction is still welcome when looking at the severity of the downtrend over the past few years. 

From a fundamental aspect brokers and analysts continue to focus on the price of iron ore with the general consensus being that it’s going to remain subdued for the foreseeable future – likely years as opposed to months.  It still interesting though that the company continues to reduce costs which now appears to be sustainable.  It’s also just announced a debt repayment program to the sound of $750m which can only be positive.  Back to the smaller degree patterns shows that the recent pivot low terminated in the typical retracement zone which in normal circumstances would advocate an upside movement.  The reason we have to be cautious is because the decline was a straight line movement and not a corrective pattern.  In other words we can’t pin our hopes on a strong leg higher on the back of hitting the 50% – 61.8% zone. 

There will be a few people watching the diagonal line of resistance which has recently been overcome.  We tend to focus on the horizontal variety which again brings us to the upper boundary of the basing pattern; for us it’s going to take a break above $3.00 to get overly excited though the recent show of resilience is a positive in regard to a more substantial bounce.

Trading Strategy

There will be a few traders and investors who have jumped on following the break up through the diagonal line of resistance though we don’t believe this development is enough to warrant being involved.  Waiting for that extra confirmation of breaking up through horizontal resistance would be the astute thing to do.  Therefore, we’ll keep FMG on the watchlist for recovery plays but a little more patience is required before looking to put our hard earned cash at risk.
 

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