Shareholders of Fortescue Metals Group Limited (ASX: FMG) have been dealt yet another blow after Morgan Stanley cut its price target on the stock by 37% to just $1.65. That represents an 18% discount compared to today's price of $2.02.
Fortescue Metals Group could be considered as Australia's mid-tier iron ore miner. Although it is in a considerably better position than some of the nation's smaller miners, its operating costs are much higher than those of its larger rivals, BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), while it also carries an enormous pile of debt.
With iron ore currently trading for US$55.86 a tonne, according to the Metal Bulletin, Fortescue is operating on extremely thin margins, at best. With further falls for the commodity expected, there is enormous pressure on Fortescue's cash flows and its ability to repay its debt on time.
As reported by the Fairfax press, Morgan Stanley analyst Brendan Fitzpatrick believes that Fortescue's ability to raise debt appears "challenged", while an equity raising would dilute the ownership of Andrew Forrest and Hunan Valin, who own a combined 48% of the business.
Barring those options, Fortescue's next move could be to sell assets, which it could do by either selling a stake in The Pilbara Infrastructure (which the company has considered), or selling a portion of the entire business. Fitzpatrick said: "Under this scenario, Fortescue might consider selling a portion of the whole business, say 15-20 per cent, into a joint venture structure."
While neither alternative would be ideal for Fortescue, it just may come to that – especially if the commodity's price continues to plummet.
Should you buy?
Despite its status as Australia's third largest iron ore miner, Fortescue Metals Group is still a risky investment prospect, as highlighted by Morgan Stanley's downgraded price target. While its shares have lost 60% of their value over the last 12 months, I wouldn't be at all surprised if they fell further still, making Fortescue a stock to steer clear of.