Why the Fortescue Metals Share Price Rose Today

What Happened to the Fortescue Metals Share Price?

Shares of Fortescue Metals Group [ASX:FMG] continued their volatile run, rising 5.23% today. Shares closed at $4.63 on Thursday, virtually unchanged since this time last week. Given that the iron ore price has held over the US$90 level for over a week now, shareholders are becoming more confident and speculating on where it might go next.

Why Did This Happen to FMG Shares?

Fortescue Metals Group Ltd is an iron ore production and exploration company with assets located in the Pilbara region of Western Australia.

Fortescue’s share price has struggled recently, despite its plans to boost iron ore production by 35% in the next quarter. The company’s share price has fallen by 30% since the beginning of this year.

Fortescue is effectively a leveraged play on the iron ore price, which has fallen over 30% for the year to around US$94.70 per tonne. I’m expecting iron ore to climb over the US$100 level in the coming months.

The issue is two-fold:
1) Fortescue has an extremely high cost of production. Analysis suggests that if the iron ore price falls below US$80 per tonne, Fortescue will be losing money.
2) Fortescue’s net debt (cash less debt) represents roughly 55% of its market capitalisation of around US$8.6 billion. This is very high.

Further declines in the price of iron ore will squeeze Fortescue’s profit margin, making it difficult for the miner to pay down its debt. This is probably what worries punters.

What Now For the Fortescue Metals Group?

FMG has recently reached its long-term ore production goal of 155 million tonnes per year, thanks to the completion of the Kings Valley project.

The stock rebounded back above its major long term support level of $4.40, smashing through the crucial $4.50 level. Confidence is crawling back into the FMG share price. Saying this, I still express caution to shareholders wanting to capture profit — if the iron ore price moves towards the US$90 level, profit margins for the company will be tight.

Fortescue’s share price direction will depend on the iron ore price. At the current iron ore price, Fortescue will struggle to repay its debt. This indicates that Fortescue speculators may continue to hit the sell trigger in panic.

Nonetheless, if iron ore rallies to around the US$115–120 region, the share price could rise above the $6 level in the next few months as a result of increased production.

Jason Stevenson+
Resources Analyst, Diggers and Drillers

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