Valuating & Financial Prediction of Fortescue Metals Group Ltd

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Valuating & Financial Prediction of Fortescue Metals Group Ltd| AFX9540 BUSINESS FINANCE|

Executive Summary

This report is written to offer a business analysis of Fortescue Metals Group Ltd (FMG) where there will be a discussion on the background of the company, its return on the pre-post announcement of raising funds, the capital structure during the global financial crisis in comparison to its peers and the estimation on the share valuation in comparison to the actual share value. Fortescue Metals Group (ASX: FMG) is an Australian iron ore mining company. The company has holdings of more than 87,000 km² in the Pilbara region of Western Australia making it the largest tenement holder in the state. It is listed as FMG on the Australian Securities Exchange (ASX). In 2008, the group loaded its first iron ore shipment bound for China. Fortescue have at least 10 Chinese steel mill contracts lasting for around 10 years. Baosteel was the first company to receive their iron ore. For the share valuation, the report uses the CAPM model to determine the prevailing cost of capital and also uses the dividend discount multistage model to predict the share price for the company. The components of the CAPM model (i.e. risk free rate, company beta, Market return and growth rate) are calculated and predicted on historical data. The valuation data is then compared with the actual market price of the shares for the corresponding years and a brief analysis is then performed on the economic and internal reasoning behind any variance encountered.

Table of Contents
Executive Summary2
1.0Brief overview of the company4
2.0Capital Structure4
2.1Funds raised by the company4
2.2Usage of the fund5
2.3Announcement date for the issue5
2.4Share-return pre and post announcement5
2.5Market return same period6
2.6 Market Perception6
2.7 Effect of recent financial crisis7
3.0 Valuation of FXJ shares7
3.1Risk free rate calculation8
3.2Market rate calculation8
3.3Beta calculation9
3.4CAPM Calculation10
3.5Growth rate calculation10
3.6Share valuation11
3.7Comparison of valuation vs. actual data12
3.8 Evaluation of the variation13
4.0 Conclusion13
Appendix 1: Cash rate target14
Appendix 2: Market data for beta calculation14
Reference & Bibliography.....................................................................................................................16

1.0General background of the Firm

Fortescue Metals Group Ltd is the New Force in Iron Ore and has joined the world's leading producers of iron ore. Since the Company was formed in 2003, its extraordinary growth has been unparalleled. Listed in the S&P/ASX 50 share index, Fortescue has firmly established itself as one of the world's largest producers and sea-borne traders of iron ore. From Construction to Production

Construction of Fortescue's port, rail and mine project commenced in February 2006 with the turning of the first sod at the Company's port site at Anderson Point in Port Hedland. Just two years later in 2008, the open-access rail infrastructure was complete and operations were underway at the Fortescue Herb Elliott Port and at the Company's first minesite, Cloudbreak. Shipping started on 15 May 2008 and Project Completion was achieved within months. On 18 July 2008, Fortescue's fifth anniversary, the Company successfully mined, railed and shipped at a rate of 24mtpa (Million ton per annum) for a one month period. In the first full year of operations, Fortescue mined, railed and shipped more than 27 million tonnes of iron ore to customers in China. Finance

Fortescue's project was founded on the raising of A$3.7 billion capital, including A$1 billion equity, during two finance road shows in August 2006 and July 2007. The August 2006 raising was the largest single high-yield Asia-Pacific transaction, the largest high-yield bond...
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