On February 22, 2014, Fortescue Metals Group Limited's (ASX: FMG) share price hit a 3-year high of $6.22. Since then, the shares have crashed by 45%, down to $3.39, taking Andrew 'Twiggy' Forrest's fortune with it.
His 33% stake was worth $6.43 billion that day. Including a number of purchases this year, Mr Forrest's stake is now worth just $3.5 billion. It's not the first time he's seen his wealth drop dramatically though, so he may well be used to it now. Perhaps surprisingly, he hasn't waded into the market to buy more shares since June this year.
The main driver of Fortescue's share price is of course the sliding iron ore price. The average iron ore price in February was US$121.37 per tonne. It's now just over US$80 per tonne, a drop of 34%.
Fortescue shares have fallen more than the iron ore price because investors are concerned about the company's relatively higher production costs. That means a lower commodity price will have a great negative impact on Fortescue's earnings that it would on say Rio Tinto Limited (ASX: RIO) or BHP Billiton Limited (ASX: BHP).
Both giant miners have all-in production costs of below US$50 per tonne, and are likely falling as they ramp up production. Fortescue has also driven production ever higher, and from its target of 155 million tonnes per annum run rate, the iron ore miner could be on track to produce as much as 180 million tonnes this financial year.
My estimate of Fortescue's all-in production costs – including interest costs and capital expenditure – for this financial year is around US$56 per tonne. With the iron ore price well above that currently, Fortescue is still profitable, with greater concerns for junior miners BC Iron Limited (ASX: BCI), Atlas Iron Limited (ASX: AGO) and Mount Gibson Iron Limited (ASX: MGX).
According to my estimates, both BC Iron and Atlas are losing money at current commodity prices, while Mount Gibson is not far away. Further falls in the iron ore price could see Mount Gibson become unprofitable, and hit Mr Forrest's wealth as well.
