How much is Fortescue Metals Group Limited really worth?

Unfortunately, the signs aren't great for Fortescue Metals Group Limited (ASX:FMG).

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No matter which way you look at it, things are not looking good for Andrew "Twiggy" Forrest's Fortescue Metals Group Limited (ASX: FMG).

The miner is stuck in a race against time with some analysts even suggesting the stock is currently worthless. To begin with, it is sitting ominously close to the point where it starts losing money on its operations, with data from the Metal Bulletin showing that iron ore is now trading for just US$52.69 a tonne, while its pile of debt is also becoming increasingly difficult to repay.

Most estimates suggest Fortescue's breakeven price is anywhere between US$50 and US$53 a tonne. It's also possible the miner is already operating at a loss (especially given that the lower quality ore that it produces attracts a significant discount from the spot price).

Indeed, the miner's desperation has become obvious in recent weeks. First of all, it failed twice to raise US$2.5 billion in debt which it had hoped to use to extend its current debt maturity profile (a large portion of its US$8.8 billion in debt will fall due between 2017 and 2019, putting it under pressure).

Then, more recently, Forrest made a controversial call when he suggested that he would be happy to cap Fortescue's production, so long as BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Vale did the same. While such an arrangement would no doubt push the commodity's price higher, such comments could be considered as cartel-like behaviour and are currently under investigation by the Australian Competition and Consumer Commission (ACCC).

What is Fortescue Metals Group worth?

As it stands, Fortescue's shares are trading at roughly $1.93, after having slipped 3.8% on Monday and 64% over the last 12 months. Despite the heavy fall however, most analysts are still shying away from the stock. By investing in Fortescue, investors are not only taking a gamble on iron ore price movements, but also on oil prices and currencies – all of which impact the miner's profits and are impossible to predict.

Given its thin margins and heavy reliance on debt, Fortescue is an extremely risky bet whereby even minor changes in any one assumption could drastically impact the stock's value.

Unfortunately, simple demand and supply economics suggest that conditions will continue to worsen for iron ore, suggesting that Fortescue is a stock to steer well clear of.

Ryan Newman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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