Shares of Fortescue Metals Group Limited (ASX: FMG) are threatening to fall to a fresh seven-year low today after iron ore prices plummeted to a new decade-low overnight. The stock fell by as much as 3.7% early in the session, hitting a low of $1.825. That compares to the $1.795 level it hit a fortnight ago which was its lowest price since early 2009.
So What: Fortescue Metals Group is a pure iron ore play, meaning that it relies on high prices to generate earnings growth. Although it has increased its production rates substantially, the increased output has failed to offset the impact of lower iron ore prices.
Overnight, the commodity crashed below the US$50 mark to just US$49.54 a tonne, according to the Metal Bulletin. At that price, Fortescue's margins will be incredibly low (impacting cash flows), while it's very possible that the miner is already operating at a loss.
Sure, it has a solid amount of cash on its balance sheet (US$1.6 billion, as at 31 December 2014) which should help it weather the storm in the near-term, but it also carries an enormous pile of debt which threatens its very existence in the long run. Of its US$8.8 billion of debt, the vast majority will fall due between 2017 and 2019.
While the miner recently attempted to raise new debt to extend its debt maturity profile, it failed to do so twice, presumably because the market perceived the rate of return to be too low considering the high level of risk involved. That should clearly highlight the trouble that Fortescue finds itself in.
Now What: According to data from the Metal Bulletin, the iron ore price has plunged more than 11% over the last six sessions, and more than 31% since the beginning of January. Unfortunately, given the rapid pace at which China's economic growth is slowing, together with the fresh wave of supplies hitting the market, prices look likely to fall even further in the near future.
Buckle up Fortescue investors, because it's going to be a rough ride.
