David Einhorn: Short Iron Ore (Great Investors Best Ideas Conference)

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is David Einhorn of Greenlight Capital.  Einhorn made a presentation entitled 'If you give a miner a dollar..." and said to short dirt.  And by dirt, what he means is to short iron ore.

While Einhorn said that everyone "should have gold miners in their portfolio," it became clear he was less sanguine about other types of miners.


Iron Ore Supply/Demand

Einhorn started his presentation with the supply/demand dynamics of iron ore, noting that the infrastructure to get ore out of the ground is not cheap.  He pointed out that it's cheaper for China to import ore from Australia than to dig it out of their own ground.  Einhorn put up a chart showing iron ore prices from 1981-2011, peaking in the most recent year.

He went on to say that, if you give miners dollars, they dig holes.  Higher prices attracted new supply and new players.  It takes years to bring new supply online and he points out that there's a massive amount of supply about to hit the market.

He points out the Chinese investment binge as the driver of demand and notes that "something that's unsustainable persists... until it doesn't."

Einhorn then shifted to steel and noted that 2010 was the last year where steel saw double-digit demand growth.  Supply now exceeds demand and they're in the midst of expansion.  Big projects from 2010/2011 are coming online and the cost of stopping development is too high.
 
Einhorn argues that you can't contain the near-term situation since it's so expensive to halt projects.  He feels that ore prices will head below 100/ton and could get as low as 80/ton.  He even said that by 2014 it could go as low as the 60's.  He opined that the iron ore situation could soon reflect the same situations that took place in polysilicon and LEDs.


Losers Singled Out By Einhorn

While Einhorn did not explicitly come out and say he was short any of these names, he put up a list of companies that will lose in this scenario:

Iron Ore Miners (huge projects that will come online into declining markets): Vale (VALE), BHP Billiton (BHP), Rio Tinto (RIO), Fortescue (FMG), Cliffs (CLF)

Equipment Makers (already have seen growth into infrastructure build): Caterpillar (CAT), Joy Global (JOY)

Integrated Steel Companies: US Steel (X), Arcelor Mittal (MT).


Einhorn pointed out that X and MT have had an advantage because they own their ore supplies while their competition purchases ore in the markets.  However, he says this competitive advantage erodes as the price of ore falls.  The price of steel is also falling.  These integrated steel companies are also facing competition from irrational Chinese steel mills that are willing to operate at a loss.

Last week we also highlighted that Tiger Management's Julian Robertson said to avoid steel stocks as well.

Einhorn argues that the equities of the above companies reflect resumption of Chinese demand but that seems dubious.  He feels like companies are investing a lot at the top.  For more from this hedgie, also check out Einhorn's presentation on 3 ideas from the Value Investing Congress.


For the rest of the GIBI presentations, head to notes from the Great Investors' Best Ideas conference.

Harbinger Capital Partners (Philip Falcone) Sells Some Cliffs Natural Resources (CLF)

In a Form 4 filed with the SEC on Friday night (1/9), Harbinger Capital Partners disclosed that they sold shares of Cliffs Natural Resources (CLF) on January 7th and January 8th, 2009. In total, Harbinger sold 1,867,121 shares through 10 different sets of orders. After all was said and done, Harbinger now owns 7,254,789 shares, down from their previous 9,121,910.

In addition to the SEC Form 4 filing, this press release was issued:

"NEW YORK--(BUSINESS WIRE)--As part of ongoing portfolio management and rebalancing, the Harbinger Capital Partners® funds announced a reduction in their exposure to Cliffs Natural Resources (NYSE: CLF) in order to bring the position in line with current portfolio metrics and may continue to do so in the future, as conditions permit. Harbinger maintains its conviction that Cliffs controls unique and valuable assets and believes Cliffs will be one of the prime beneficiaries of the eventual economic recovery.

Though it has adjusted its stake in Cliffs, Harbinger maintains its commitment to supporting value-maximizing strategies at Cliffs and, as such, reserves the right to be in contact with members of management, members of the Board, shareholders and other relevant parties regarding alternatives that Cliffs could employ to maximize shareholder value. Harbinger also reserves the right to repurchase shares in the future if it deems it appropriate for its investors should the portfolio metrics permit."

You can view the rest of Harbinger's portfolio holdings here (13F filing).