The most crowded trade - Short FMG - and why we would not want to be short.
The street has become increasingly bearish on Iron Ore and FMG given its levered balance sheet, with sell side analysts now seemingly competing to downgrade their Iron Ore price forecasts after a 70% fall from its 2013 high. Indeed Iron Ore is an oversupplied market and now in surplus. The Seaborne Iron Ore market is ~1.5btpa, which only recently had annual deficits of ~50mt. As the lowest-cost majors Vale, RIO and BHP continue to materially expand production, the Seaborne market is projected to swing into material surpluses of ~200mtpa+ by 2016. However if Iron Ore were to fall below recent lows of US$47/t (or hit US$35/t as some pundits were calling for), you would see material supply curtailments and the industry correct itself. In our view Iron Ore bottomed in early April (its price having bounced ~38% off its lows) and FMG bottomed soon after, when it refinanced its near term maturity debt. With FMG liquid, solvent (no debt now due til 2019), achieving ongoing cost reductions, a shift from “ongoing major expansion mantra” from the majors, falling China port inventories and China Steel Mill restocking underway, and FMG still being one of the most highly shorted stocks on the ASX (ie. a massive short squeeze candidate), we would not want to be short FMG. In fact we went long at $2.11/sh on the 23 Apr 2015 for these very reasons. For our full write up on FMG please see our monthly: (VIEW LINK)
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John co-founded Paragon in 2012 and became principal and majority shareholder from 2017. John is responsible for executing the investment strategy and managing the Paragon Australian Long Short Fund. John has had 16 years in financial markets,...