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Fortescue Metals

By Dan Stratful (AFA)

Tuesday 26th June 2012

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Fortescue Metals (ASX: FMG) has received a vote in confidence after founder and Chairman Andrew Forrest lifted his stake to 32% in the company, after the on-market purchase of 12.8 million shares at a value of AUD$62 million.

The purchases were made on-market between Wednesday last week and yesterday, and gives Forrest a total of 995.7 million shares in FMG - Australia's 3rd largest iron ore producer.

Sizable ‘short' positions in FMG are noted by market participants in the market, as traders bet there will be further fallout in FMG's share price due to slowing economic growth in China, which reduces demand for iron ore and results in falling iron ore prices.

However, Australia's 2nd largest iron ore producer Rio Tinto has invested heavily in iron ore expansion after recently approving a further US$4.2 billion investment in the expansion of its iron ore mining capacity in the Pilbara region of Western Australia.

Rio anticipates rising demand for iron ore over the medium to long term, which it thinks will be driven by rising consumption in China.

The concern with FMG is its enormous amount of debt, which stood at US$4 billion as at 31 December 2011, and any further weakening in the iron ore price due to lower demand, could see the company financially stretched.

Investors looking for an iron ore pure play and are concerned with FMG's high level of debt and gearing, may consider Atlas Iron (ASX: AGO), another major iron ore producer in WA's Pilbara region. AGO  - the Pilbara's Emerging Powerhouse - in contrast to FMG's heavy debt burden, has nil debt and $380 million in cash as at 31 December 2011, and is a rumored takeover target.

Status: GROWTH BUY

FMG's shares today traded at $4.84


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