After climbing nearly 24% in just two-and-a-half weeks, it seems that Fortescue Metals Group Limited's (ASX: FMG) dream run may have come to an abrupt halt.
Since peaking at $4.845 on Friday last week, Australia's third largest iron ore miner has dropped 8.6% between Monday and Tuesday to now be trading at just $4.43. The shares are still sitting 28.8% below their February high of $6.22.
While Fortescue is highly leveraged to the iron ore price, it is a good stock to consider for investors who believe the commodity is currently undervalued. Indeed, the commodity's recent climb from below US$90 a tonne to over US$96 is one of the primary reasons behind the stock's jump.
However, there are still strong indications to suggest that iron ore will restart its retreat in the coming months and could possibly fall as low as US$80. Should that happen, I wouldn't want to be holding Fortescue's shares, nor the shares of any other higher-cost miner like Arrium Limited (ASX: ARI) or Mount Gibson Iron Limited (ASX: MGX).
For investors wanting exposure to the sector, it would be a good idea to limit your risk with lower-cost miners who have greater diversity between operations. BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) would both be solid options at their current prices.
A better bet than Fortescue Metals Group
With Fortescue's shares being totally at the mercy of the volatile iron ore price, they are just too risky for me.
