The fear of doom has quickly turned into the fear of missing out on a boom, as markets turn sharply in Australia, helped along by firming commodity prices. No stock illustrates this better than Fortescue Metals Group (FMG), which yesterday extended its recent rally by jumping another 23.69% to close at $3.08, which is 50c higher than its 2015 closing high. It's also a 114% jump from the stock's $1.44 low in January this year. Why? Iron ore trading heated up throughout the Asian time zone yesterday and finished a whopping 18.59% higher at US$63.74 per tonne. While the falling iron ore price created a buying vacuum on the way down, the rising price has brought back speculative buyers in droves. FMG last week had daily trading volumes of between 8 million and 33 million, and yesterday 62 million shares changed hands. Short interest in FMG has recently been between 8%-10%, and given that its stock price hasn't seen these levels since late 2014, it would have called out a lot of leveraged shorts and exacerbated buying.
FMG reaffirmed just a couple weeks ago that its cost guidance for producing iron ore is US$13 per wet metric tonne, and after drying and shipping that figure probably doubles – their latest dry metric tonne breakeven sale price was US$28.80. But you can imagine the transformation that this business will undergo when it has a US$28.80 breakeven and then the sale price shoots from US$35 to US$64 – so was yesterday's rally overdone? Only if the iron ore price is about to illustrate the same price volatility back down as it has on the way up over the last couple of months. If not, it's game on for FMG.
Before anyone takes any credible potshots at guessing whether this highly-unusual 19% spike in the iron ore price will reverse or not, they first need to know why it happened in the first place. I for one have not seen any analysis that has produced a smoking gun this morning – the finance writers keep quoting days-old news about China's 6.5%-7% GDP growth targets, and I suspect you'd get a much more valuable view from a dock worker at port facilities near Pilbara, Western Australia. My best guess is that Chinese steel-making buyers got spooked by consistent rises in the price of iron ore and decided to lock in their forward costs for a considerable period by negotiating some huge deals in a single session yesterday. Unlike more accessible commodity markets like copper, nickel, precious metals etc., iron ore isn't a typical destination for speculative traders because large sales generally take place between the producers and steel makers, and the market has only recently been opened up to wider markets by global exchanges utilising iron ore swaps, and the Singapore Exchange offering futures contracts from last year – available on the Rivkin Trader platform (simply type in 'iron ore' and pick the front month futures contract).
You'll recall that former Treasurer Joe Hockey picked a magic figure of US$35 per tonne to put into his estimates with regard to absent tax revenues from iron ore miners, and the market got there – in fact it was there just three months ago. Now that we're looking at a price of US$64 per tonne, at the same time as companies with the scale of FMG, BHP and RIO have been driving their productions costs down, of course there is plenty of room for rallies in these mining and peripheral mining services names, and some great news for government revenues if prices hold up.
The big question is, how many stocks on the ASX that were priced as a 4/5 risk due to commodity-price-related earnings contraction have the potential to spring back like this? Mining services firm WorleyParsons (WOR) has doubled in the last three weeks, Beach Energy (BPT) has done the same, as has the energy stock AWE Limited (AWE). You will find a litter of examples like this on the ASX 200 and it is either the start of something bigger or a premature sense of euphoria from recent commodity price rises following a sustained period of depression among commodity stocks.
All of these trades remain high risk – but as outlined in our Virtually Live shows, the more cash flows in these things the better. BHP quite possibly called the bottom of the market with their ultra-conservative, ratings-agency-pleasing results commentary in late February. Just as it has finally appeased those calling for cost-cutting, cuts to dividends and balance sheet protection, the next call from shareholders will probably be "increase your capital expenditure!!!"
I don't envy any mining executive trying to make decisions that are based on the extreme commodity price volatility that persists presently. And I don't envy any of you who are innately compelled to seek answers to the question, "Should I be buying resource stocks right now?" But I know you'll want a plain and simple answer to that, and in my opinion it's probably one of the best high-risk trades you'll see in a long time. You could be lazy and buy the listed 'QRE' ASX 200 resources sector exchange traded fund, which holds BHP, RIO, WPL, NCM, ORG, CTX, OSH, S32, STO and FMG in that order of weighting. Otherwise, your good mates at Rivkin will put together a list of the bigger end of the ASX 200 resources sector and their respective discounts to intrinsic value and you can take your pick. Rivkin Local and Global members will get this for free, if anyone else would like this special report you'll need to shoot your name and mobile numbers to email@example.com and you'll be notified when it's ready (48 hours approx).
With all of this going on, the Aussie dollar is absolutely loving life – trading at US$0.7460. You can see on the second chart that the 50 day moving average is beginning to make a charge for the 200 day moving average, which would mark a significant shift in the AUDUSD trend.