Should You Buy FMG at This Price?

What happened to the FMG share price?

Surprise, surprise! Fortescue Metals Group [ASX:FMG] paid down another US$500 million today. So far, the company has repaid US$2.9 billion, reducing its interest expenses by US$186 million.

Fortescue CFO Stephen Pearce has done a splendid job in cutting the group’s costs, while lifting operational performance. That has allowed Fortescue to reduce the massive debt pile. As a response to the good news, the stock rallied by more than 5% in early afternoon trading today.

Why did Fortescue Metals shares do this?

The company has always been highlighted as one with considerable credit risk. After all, Fortescue had a lot of debt, and it operated in a completely hostile environment when the iron ore price fell through the floor.

Despite that, the company executed the right strategy — cutting costs and focusing on efficiency. Mind you, the group still has an attractive cash cost today, at below US$30 a tonne. That is more than low enough for the current iron ore price, which is just above US$50 a tonne.

Think about the commodities space for moment. Energies have bottomed, as have many of the commodities. The free fall in commodity prices was overdone, and we have so far witnessed reflation back to a more reasonable level this year.

However, the supply glut has not been resolved yet…it has a long way to go. We are still operating in an environment of weak demand from emerging markets such as China.

That’s on top of oversupply, with producers like Australia continuing to flood the market with iron ore. Rebalancing is going to continue, and it will take a rocky second half of 2016 to achieve, potentially, a marginally higher price than now.

What now for Fortescue Metals Group?

FMG has been one of the strongest momentum stocks of late. Investors shouldn’t ask for more than that. FMG will continue to deliver as a momentum stock. However, its fantastic run may run out of steam at any time, as every momentum stock eventually does.

If you are thinking of getting into FMG now, you can do that. But be very active, because the huge ‘paydays’ on the stock may soon be behind us. Given slack fundamentals, the stock rally will be capped at some point.

Should you opt for some other stock? Sure, there are plenty out there. We tell our readers about it all the time at Port Philip Publishing. As for FMG, I have personally been monitoring it in a portfolio; I honestly cannot ask for much more from what the stock has already achieved.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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