Shares in Fortescue Metals Group were roughed up again for a second day yesterday as the company was forced to defend how it announced the controversial link up with the huge Brazilian miner Vale.
A letter from the ASX to the company questioned the release on Tuesday, less than a day after the company’s shares had soared 24% on Monday.
The shares fell more than 7% at one stage yesterday before steadying and ending the day off 3.2% at $2.70. That’s a fall of more than 12% in the past two days after Monday’s surge of close to 24%.
In response to the”please explain” letter from the ASX, released yesterday morning, Fortescue said the 23.7% jump in shares to $3.08 on Monday was “consistent with the iron ore market and futures trading, together with the high level of short trading in Fortescue shares”.
The company pointed to rises of between 20-23% in physical iron ore markets and futures prices. It also said other ASX-listed companies were “highly leveraged to the iron ore price showed increases higher than Fortescue” on the day.
And while the latter point is true (Arrium shares leapt 33%, or just 6 cents to 24 cents on Monday), the size of the rises in money terms and the base share prices were much smaller than Fortescue’s.
And the company failed to acknowledge that much of the 29% jump in the iron ore price on Monday and other big price moves in other iron ore markets in Asia happened after the ASX had closed at 4pm
Fortescue also said that its memorandum of understanding was “subject to confidentiality restrictions” but that it and Vale “recognised the potential for a leak".
Fortescue did not canvass whether it had thought of asking for its shares to be suspended ahead of the announcement of the tie up with Vale.
"Accordingly, the parties had agreed to work together on the terms of separate but complimentary stock exchange releases and were in the process of doing so. These releases would have been issued either to forestall or in response to media speculation, which could or might create a false market,” Fortescue argued in its reply to the ASX letter.
A trading half from the opening on Monday would have halted any speculation.
But the most amazing part of the Fortescue reply was its one word reply to the first question from the exchange yesterday Q&A with the ASX
ASX: “Does Fortescue consider the information disclosed in the First Announcement to be information that a reasonable person would expect to have a material effect on the price or value of its securities?”
Fortescue: “No.”
You have to wonder if the Fortescue board is really on top of things – the deal between two of the world’s biggest iron ore miners and exporters was always going to have a “material effect” on the value of Fortescue shares. Just imagine if Vale pulls out of the deal for whatever reason, what do you think will happen to the price of FMG shares?
It was a big deal, and that was just the iron ore blending part – the equity link up and the slow realisation that it had blown up the control premium in the FMG share price, was also ‘material’ by any definition, except that used by the Fortescue board.
There will be continuing speculation from now on that vale will bid to buy more of FMG above its 14.9% cap by making an offer for the other shares, including the one third stake held by Mr Forrest. Just keep an eye out for news reports that Vale has been to FIRB and lodged an application to build its stake above 15%.
