Billionaire Forrest Leads BlackRock Buying Iron Ore: Commodities

Fortescue Metals Group Ltd. Founder Andrew Forrest
Andrew Forrest, founder of Fortescue Metals Group Ltd. Photographer: Ron D'Raine/Bloomberg

Australia’s richest man Andrew Forrest is buying iron ore shares at a time when producers are at their cheapest level in three years.

Forrest, the founder of Australia’s third-biggest iron-ore exporter Fortescue Metals Group Ltd., spent A$135 million ($137 million) buying stock in his company in June. BlackRock Inc., the world’s biggest money manager, this month outlaid about A$94 million to lift its Fortescue stake. The steelmaking raw material is forecast to gain 18 percent by the second quarter next year, data from three analysts surveyed by Bloomberg shows.

New iron ore mines and expansions are being delayed by rising costs at the same time as data yesterday showed imports by China, the world’s biggest steelmaker, rose to a record. The data came the same month a survey modeled on the U.S. Federal Reserve’s Beige Book showed China’s economy is in better shape than official statistics suggest.

“It’s not just Fortescue, there are other iron ore companies all over the world that are offering great value,” Evy Hambro, portfolio manager of BlackRock Inc.’s $11 billion World Mining Fund in London, said by phone. “You’ve had a very clear signal sent to the market by Andrew Forrest that he’s putting his money where his mouth is in terms of increasing his holding.”

Iron ore companies in the Bloomberg Industries Global Iron Ore Mining Index are trading at 5.6 times earnings. The last time the index ratio fell below 6 times earnings was in January 2009. Iron ore companies underperformed the price of the raw material by about 8 percent in the second quarter, according to Bloomberg Industries.

China Concerns

“The whole resource sector has dropped as a consequence of concern about China’s growth profiles and Europe and that provides opportunities for those that are more focused on individual propositions to invest and make good returns,” John Robinson, Melbourne-based chairman of Global Mining Investment Ltd., said by phone. His fund owns shares in Rio Tinto Group, BHP Billiton Ltd., Fortescue and Atlas Iron Ltd., and has been boosting its iron-ore position in the past year. The fund is overseen by BlackRock.

London’s Ferrexpo Plc as well as Arrium Ltd., the Sydney-based steel and iron-ore producer that changed its name from OneSteel this month, and Cleveland, Ohio’s Cliffs Natural Resources Inc. have the lowest forecast price to earnings ratio of producers, according to data compiled by Bloomberg.

Atlas Iron

BlackRock Fund Advisors on July 6 disclosed the purchase of 19.2 million shares in Fortescue, taking its stake to about 2 percent. BNP Paribas SA bought 2.3 million Ferrexpo shares on April 30 and Schroder Investment Management Ltd. bought 14.1 million shares in Atlas Iron on May 31, increasing its stake to 8.58 percent, according to data compiled by Bloomberg.

Fortescue rose 1.7 percent to A$4.92 at the close of trading in Sydney, while the key S&P/ASX 200 Index ended little changed. Arrium was unchanged. Ferrexpo gained 5.5 percent in London trading yesterday.

Schroder declined to comment on the purchase when contacted by e-mail, citing a global policy not to comment on stocks. Anita Poppi, a Sydney-based spokeswoman for BNP Paribas, wasn’t immediately able to comment.

Project delays and rising costs are crimping new supply are helping push prices higher, while China’s domestic iron-ore producers struggle to turn a profit, said Justin Smirk, a Sydney-based commodity analyst with Westpac Banking Corp.

‘Getting Suspicious’

“We’re getting increasingly suspicious of estimates of large supply responses,” he said by phone. He’s forecasting iron ore to trade at $185 a metric ton by the third quarter of next year from $135.50 a ton currently. “China’s ability to raise domestic iron-ore production profitably is being hampered by rising costs.”

China’s iron ore imports in the first six months this year gained 9.7 percent from a year earlier to a record 366.2 million tons, General Customs data showed yesterday. The previous record was set in the second half of 2011.

Delayed projects include Anglo American Plc’s Minas Rio in Brazil, which was originally slated to open in 2009, and Simandou in Guinea, which Rio Tinto anticipates will start in 2015 rather than next year, as previously forecast.

Vale SA, the world’s largest producer, delayed an $8 billion expansion of the Serra Sul project last year because of permitting issues, higher costs and labor shortages. Hancock Prospecting Pty, controlled by Asia’s richest woman Gina Rinehart, said last month it will delay the Roy Hill project because of a legal challenge.

Wealth Rankings

Rinehart is ranked as the 29th wealthiest person in the world with a net worth of $18.7 billion, according to the daily Bloomberg Billionaires Index. Forrest’s net worth is estimated at $5.2 billion, according to data compiled and calculated by Bloomberg, ranking him second behind Rinehart in Australia.

Fortescue spokeswoman Yvonne Ball declined to comment on Forrest’s purchases when contacted by phone.

The China Beige Book, through interviews of about 2,000 company executives and bankers from May 14 to June 8, found manufacturing and retail sales strengthened, in contrast with official data that showed the weakest non-holiday sales growth since 2006 in May.

The survey by CBB International LLC suggests China’s measures to reverse the deepest slowdown since 2008 may be boosting growth even as Europe’s sovereign debt crisis crimps exports.

More Stimulus

“We’ve already seen lower rates out of China and we expect there’d be additional fiscal stimulus,” Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne, said in a telephone interview.

The data contrast with another private survey watched by investors, the manufacturing purchasing managers’ index released monthly by HSBC Holdings Plc and Markit Economics. That gauge fell in June to the lowest level since November, showing a contraction for an eighth straight month. The survey covers executives at more than 400 companies.

Customs data yesterday also showed China’s total imports rose less than anticipated in June as export growth slowed, adding pressure on the government to support demand.

The weaker data may lead to more stimulus measures that would benefit raw material suppliers, underpinning demand for their products as China’s new government seeks to boost the economy during the second half of the year, said Schroeders.

China Urbanization

“A lot of people are arguing we’re currently seeing the peak in growth in Chinese steel demand,” Westpac’s Smirk said. “We disagree, we don’t think that’s going to occur until 2015-16.”

Rio Tinto, the second-largest shipper of iron ore, expects China to boost steel output by 43 percent to 1 billion tons by 2013 as it continues to urbanize. Global steel demand will probably increase 3.6 percent this year, from 5.6 percent in 2011, the World Steel Association said in April.

The London-based company sees the nation’s growth accelerating in the second half and is tipping annual growth of 8 percent, beating China’s target of 7.5 percent.

Vale is the cheapest of the three biggest exporters and may have a price to earnings ratio of 5.6 times next year, compared with its current ratio of 5.8 times. The ratio for Rio is estimated to decline to 6 from 7 times and BHP’s ratio will be 8.9 from 9.6 times.

“A doomsday scenario where prices collapse to sub-$100 a ton in the next six months looks unlikely,” said Pengana’s Schroeders. He’s bought Rio Tinto, BHP and Fortescue shares in the past two months. “Under that scenario the companies look relatively cheap.”

Buy Ratings

Rio has 28 buy ratings, representing 88 percent of ratings, the most of the iron ore producers considered, followed by India’s Sesa Goa Ltd. and Fortescue with 20 buy ratings each, or 50 percent of ratings and 95 percent respectively. South Africa’s Assore Ltd. has the lowest with 2 ratings and then Kumba Iron Ore Ltd., controlled by London-based Anglo American, both representing one third of analysts.

Brazil’s MMX Mineracao, India’s NMDC Ltd and Cap SA, Chile’s biggest steel and iron-ore producer, are forecast to be the three most expensive of the companies compiled by Bloomberg.

Chinese Premier Wen Jiabao said downward pressure on the economy is still “relatively large” and the government will intensify fine-tuning of policies, the official Xinhua News Agency reported July 8. Asia’s largest economy probably grew at the slowest pace in three years in the second quarter.

There are now signs that growth may steady after leaders stepped up stimulus to counter a slowdown and new home prices rose for the first time in 10 months in June.

“The Chinese are working very hard to restore growth in the economy,” said GMI’s Robinson. “The graduated response they’re showing at the moment is welcome and a good sign for the resource sector.”

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