The pure play iron ore miner Fortescue, whose shares went ballistic yesterday, was sliding today as questions were asked about the wild price rise.
The shares added 23.7% yesterday to close at to $3.08, more than doubling since its 12-month low of $1.44 on January 21.
In early trade today, the shares jumped again, about 4%, before dropping. At the close, they were down 9.4% to $2.79. But that is still 35% higher than at the start of the month.
The shares are falling today despite a 18.6% rise in the price of iron ore to $63.74 a tonne. Other miners are soaring, including Atlas Iron which is up 40% to $0.031 and BC Iron 15.7% to $0.22.
Fortescue CEO Nev Power says the share price rise was moved by short covering. “Fortescue is a heavily shorted stock and what we have seen over the last 24 hours is an unwinding of shorts in the listed iron price stock,” says Power.
“Short covering” is a market phenomenon which can drive sudden spikes in share prices as people who have loaned out stock betting the price will fall scramble to buy back their borrowed stock, often at a premium.
There had been reports that Fortescue could be taken to task over continuous disclosure laws and that at least some of the stellar share price rise was because the market had got wind of a joint venture deal with the Brazilian miner and iron ore giant Vale announced today.
Fortescue, noting media reports, issued a statement today: “Fortescue is aware of its continuous disclosure obligations to the ASX and the ongoing commitment to update the market, if and when, there are matters to disclose.”
And Power says the talks with Vale had been going on for a year now. “I don’t think there’s any relationship to the share price,” he told a briefing. “If you look at our share price versus the rest of the market it’s pretty well in line.”
The Vale deal is designed to create a blend of iron ore more attractive to the Chinese market, where a slowing economy and a glut in steel production has reduced demand.
The agreement also allows Vale to take a stake in Fortescue of between 5% and 15%. The deal is aimed at selling more ore and getting better than average prices for it.
However, market commentators point that Vale probably isn’t in a position to make significant investments at this time.
Vale’s Samarco mine, which it owns 50/50 with BHP, is subject to compensation and rehabilitation costs following a fatal dam disaster in November.