Twiggy Forrest buys $11m of Fortescue Metals Group Limited: Should you buy too?

Is Twiggy's purchase a good sign for Fortescue Metals Group Limited (ASX:FMG)?

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The price for a tonne of iron ore has plunged over 40% in 2014 and recently hit a new five-year low of US$70. The dive has taken with it the share price of many of Australia's iron ore companies, particularly those with relatively high production costs. Here are some of the worst hit in 2014:

Fortescue Metals Group Limited (ASX: FMG) is down 48%

Atlas Iron Limited (ASX: AGO) is down 80%

Mount Gibson Iron Limited (ASX: MGX) is down 61%

Gindalbie Metals Ltd. (ASX: GBG) is down 75%

Stocking up!

In an interesting, if not unsurprising revelation last week, Fortescue Metals chairman Andrew 'Twiggy' Forrest spent $11 million on his company's shares to grow his stake from 33.2% to 33.3%. His purchase showed a degree of confidence in the outlook for the company he started in 2003 and resulted in a 2.1% rise on Friday.

In what must have been a stomach churning ride for him, the plunge in Fortescue's share price has cut Mr Forrest's holding value from $6.2 billion in February to just $2.8 billion today.

Time to Buy?

Foolish investors will know that resources companies rarely, if ever, have sufficient competitive advantages over peers to be investment worthy. Fortescue is a high-cost producer and is on the verge of profitability with the iron ore price hovering around US$70. The company has demonstrated an ability to continually reduce production costs over the last two years, but the iron ore price has fallen much faster, demonstrating the systemic supply and demand problem that all miners face.

The market is being flooded by increased supply from larger, lower cost suppliers like BHP Billion Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Gina Rinehart's Roy Hill. High cost companies like Fortescue and Atlas have no ability to impact either the demand or supply of the generic product they produce, and thus cannot be relied on to be profitable over the long term.

A better option?

Mining companies can, in good times, produce both growth and income for investors. In times like today, they may produce neither.

Motley Fool contributor Andrew Mudie owns shares of Fortescue. You can find Andrew on Twitter @andrewmudie

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