What Happened to the Fortescue Metals Group Share Price?
Shares of Fortescue Metal Group [ASX:FMG] fell 2.16% to $4.53 today. The iron ore price is trading at US$94.00 per tonne. This represents a profit margin of roughly $14 dollars per tonne for Fortescue.
Why Did This Happen to Fortescue Metals Group?
Fortescue Metals Group Ltd is an iron ore production and exploration company with assets located in the Pilbara region of Western Australia.
Like many other iron ore operators, Fortescue’s share price has struggled recently. The company’s share price has fallen by 18% since the beginning of this year.
Fortescue is effectively a leveraged play on the iron ore price. Although it has two issues:
1) Fortescue has a high cost of production for a large miner. Analysis suggests that if the iron ore price falls below US$80 per tonne, Fortescue would lose money.
2) Fortescue’s net debt (cash less debt) represents roughly 50% of its market capitalisation of around US$7.2 billion. This is very high. Although, it’s improved slightly since the last quarter as its cash balance has risen.
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The company increased its cash position by roughly US$500 million in the June quarter to US$2.4 billion. As long as this trend continues, the company should safely be able to meet its debt obligations over the next couple of years.
Nonetheless, further declines in the price of iron ore will squeeze Fortescue’s profit margin. This is what worries investors.
What Now For Fortescue Metals Group Ltd?
FMG recorded a production run-rate of roughly 155 million tonnes per year over the quarter, thanks to the completion of the Kings Valley project.
Fortescue’s share price direction will depend on the iron ore price. It’s been fluctuating around the mid-US$90 dollar range for some time now. With FMG’s share price remaining in a primary uptrend since June, it indicates the market anticipates a higher price for the commodity.
If the iron ore price can increase and hold above the US$100 dollar level, Fortescue’s share price should be trading above $5 per share.
Jason Stevenson+
Resources Analyst, Money Morning
The post Why the Fortescue Metals Group Share Price Fell Today appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
