After a remarkable run, and hefty shareholder returns, we see the risk/reward balance for FMG finally skewed to the downside. A mass-scale low-grade pure iron ore producer, and fledgling energy aspirant, we see FMG as being particularly sensitive to a maturing iron ore cycle. Adding to risks, cost pressures are surging in WA which could lead to a softer Q4 sales/cost performance and potential further Iron Bridge downgrades. We have upgraded short-term iron ore forecasts, while also increasing operating cost assumptions and reducing FMG’s multiple closer to its peak cycle level. We pull back our rating to REDUCE (from HOLD) with a revised target of A$18.70.
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