Capital Group’s $300 million Counter-Cyclical Plunge Into Mining
Fat profits can be made from counter-cyclical investing which is what The Capital Group, a big U.S. fund manager, must be hoping for from a $300 million plunge into the mining industry as other investors stream through the exits.
Capital’s investment in Fortescue Metals Group , Australia’s third biggest iron ore miner, has seen it emerge with a 5.02% stake to become the company’s 6th biggest shareholder.
A 50% fall in the price of iron ore over the past 12-months has hurt all producers of the steel-making material, including Fortescue which has seen its shares drop by 60% over the past year, though at one stage last week the stock was down by 70%.
Capital’s acquisition of Fortescue shares appears to have accelerated around the time the miner touched a six-year share price low of $1.47 with buying for a number of funds it manages being reported to the Australian stock exchange earlier today after passing the 5% mark, the legal reporting point for a major shareholder.
Contrary View Stirs Investor Interest
The buying by a major new investor has ignited interest in Fortescue, either because a corporate play could be unfolding or because a fund manager with extensive research capacity has formed a contrary view to the wider market about the outlook for mining.
Since hitting that low of $1.47 just seven days ago Fortescue’s share price has enjoyed a 31% rally to close today at 1.93.
Capital’s interest in Fortescue, which is dominated by its billionaire founder, Andrew Forrest and his 30% stake in the stock, defies negative sentiment towards both iron ore and the Australian dollar.
Iron Ore And The Aussie Dollar Are Down Sharply
The iron ore price, which has fallen from $130 a ton at this time last year to the latest trades in the Chinese port of Shanghai at $62.58/t, is not expected to recover until Chinese steel production picks up, and no-one knows when that might happen.
The Australian dollar, which has fallen by 25% over the past 12-months to US77c, is also expected to remain weak for some time with commodity prices appearing to be stuck at cyclical lows, or continuing to weaken.
Most investment banks which analyse Fortescue have a cautious view of the stock and appear to have been caught out by Capital’s heavy buying.
Investment Banks Were Neutral Before Capital Revealed Its Buying
J.P. Morgan , Citi, Deutsche Bank , Macquarie and UBS issued advisory updates on the stock last week after the release of its December quarter production report with each giving a neutral recommendation.
The banks were impressed with Fortescue’s cost cutting efforts, which have been aided by cheaper prices for fuel used by heavy haulage equipment in the company’s mines, but also see several years of lean profits ahead. Heavy debt repayments are also weighing on the miner.
Capital Group will be well aware of the negative sentiment surrounding the iron ore industry which is caught in a market-flooding exercise by major producers such as BHP Billiton and Rio Tinto as a way of driving competition out of the market, in much the same way Saudi Arabia is roiling the oil market.
But, a $300 million bet on Fortescue obviously means that Capital has formed a more positive view about the outlook than some of the other big names of the investment community.