Noted Short-Seller Jim Chanos Betting Against Fortescue
Hedge fund manager and prominent short-seller, Jim Chanos, founder of Kynikos Associates, presented his short thesis on an iron ore miner at Grant's Spring Conference earlier this month. The company that Chanos is targeting is Perth, Australia-based Fortescue Metals Group (ASX:FMG). The company, which has a market cap of $17.53 billion, is traded on the Australian stock exchange.
He told investors at the conference that the company has "a somewhat promotional management team" and said that the stock is a "value trap." He also voiced his belief that Fortescue shares will fall "materially." According to an account of the presentation in Grant's Interest Rate Observer, Chanos said, "in our hedge fund, we are long BHP vs. Fortescue and others. BHP is a much more stable company. They see the cycle more than others do, they've through it more than others have and it's been an interesting hedge for those that play it that way."
In expounding on his short Fortescue trade, Chanos said "It's got about $2.8 billion in EBITDA (earnings before interest, tax, depreciation and amortisation) but it's got a capex (capital expenditure) program last year of $1.5 billion, and it's going up."
He added, ''increasingly, with any kind of reversion to the mean of iron ore prices to $US100 per tonne or less, we're going to see a dramatically lower ability to service the debt and to service the capital programs they have. And a stock price materially lower than it is today.''
Chanos believes that sooner or later, iron ore prices will revert back to historical prices. He said that the surge in prices as "fuel for China's bubble," and noted that company's such as Fortescue are pursuing expansion through debt at a time when Chinese demand growth is flattening. These trends "increases risk to Fortescue debt-financed expansion," according to Chanos.
The Sydney Morning Herald quoted Fortescue's CEO Nev Power in its article highlighting Chanos' short position in his stock. Power rejected Chanos' thesis on declining iron ore prices. He told the Herald that ''The world has moved on. We see tremendous support at $140. I understand the shorters would love to see that happen where they can create an environment of panic selling. That's how they do their business. We're building long-term reliable, sustainable infrastructure, which will position us well."
Power also said that "one of our key strategies has been to get expansion in early and take advantage of high iron ore prices and get cash flows coming in … to help pay down that debt rapidly.''
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