Fortescue Metals Group Limited's (ASX: FMG) shares have dropped a heavy 22% since the beginning of the year and 27% since peaking late in February. The stock has ranged from a low price of $2.87 almost 12 months ago to an intra-day high of $6.22.
Although the stock is now trading on a P/E ratio of just 4.1, I'm still not confident enough to put my money behind Australia's third-largest iron ore miner.
Here are three reasons why I don't think you should go near it either.
- As a pure iron ore play, Fortescue is completely at the mercy of the commodity's price. Although its cost base is improving as it ramps up its production levels, the plummeting iron ore price will still affect Fortescue far more than it will larger rivals like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
- Speaking of the iron ore price, it is expected to continue plunging further. After trading for an average US$135 a tonne throughout 2013, it has since dropped back to around US$94 a tonne. Over the coming 12 months, it could fall as low as US$80 as the miners heavily ramp up their production rates and demand falls, which will apply even greater pressure to Fortescue's margins.
- With falling margins, Fortescue's enormous debt levels are looking more and more ominous. As at December 2013, the company had a net debt of $8.7 billion. As its margins come under pressure, so will its ability to repay debt, which would see investor confidence sink even lower.
A better bet than Fortescue
Despite the heavy price drop in Fortescue's share price, I can't help but think there could be further to fall. The company is far too reliant on iron ore for its earnings and I fear that could prove detrimental in the medium to long-terms.
