Fortescue Metals Group Ltd [ASX:FMG] has slumped 5% to $7.24 in late trading on Friday, 26 April 2019, giving up more gains after hitting a decade high of $8.24 last week. Fortescue has been on a strong bull run over the last few months on the back of a spike in iron ore prices, after their competitor Vale was forced to close mines in Brazil after another dam failure.
March quarter production down due to cyclones
March quarter production numbers were released on 18 April and showed shipments of 38Mt, which was lower than broker expectations. The top end of FY2019 guidance has been trimmed by 3Mt, with a new range of 165–170Mt. Unit costs were also higher due to the lower volumes. Cost guidance is now US$13–13.50/t from US$12–13/t.
The weaker March quarter production numbers may be behind the recent weakness, but there were some very positive signs within the figures with average pricing a solid US$71 per tonne.
The market is expecting there to be some weakness in iron ore prices going forward once Vale can reopen some of the closed mines in Brazil, but the situation remains fluid and timing is unknown at this point.
With the stock up 134% in seven months, it is not surprising to see a correction after tapping decade highs, but a substantial pullback in prices in the short term could provide a buying opportunity.
Iron ore prices to remain well bid despite Vale resuming production
Even if iron ore prices were to see some weakness in future months, the investment case for Fortescue remains strong.
The forecast dividend yield for FMG is more than 10% over the next three years which is compelling. Dividends are expected to increase by nearly fivefold over the next couple of years. These forecasts are on the back of expectations that iron ore prices will ease back from their current levels around US$80 to the low US$60s over the next year or so. If prices remain elevated, Fortescue will beat market expectations easily.
Iron ore markets are expected to remain tight over the short to medium term, despite Vale bringing its Brucutu mine back online.
For Money Morning
PS: If you want to know more check this out: Watch These 10 Aussie Mining Stocks Go NUTS in 2019 (number eight is a ripper!).