Fortescue Metals Group Limited (ASX: FMG) has again come under heavy selling pressure today with the stock dropping 2.75% to a fresh low of $1.765. That's the lowest price the shares have traded at since early 2009, and there are signs conditions are only going to get worse for investors still holding them.
While Fortescue is Australia's third largest iron ore miner, it maintains significantly higher operating costs than its larger rivals, while it also produces a lower quality ore. That means that the iron ore price is likely to have already dropped below Fortescue's 'breakeven' level and the miner may have to sell its product at a discount to the spot price due to its lower quality.
Of course, Fortescue's solid cash balance (US$1.6 billion as at 31 December 2014) could help it weather the storm for longer than its high-cost rivals, although its US$8.8 billion in debt could also cripple it.
The news gets worse.
According to the Metal Bulletin, iron ore is hovering just above US$47 a tonne after having fallen 1.7% overnight. The commodity is down around 23% since early March which even prompted the Australian government to consider the impact on its budget should iron ore drop to just US$35 a tonne a scenario which is looking increasingly possible as the weeks go on.
The problem is, the government isn't the only group thinking that way. According to Fairfax, Citi Research has also issued a report forecasting prices to average just US$37 a tonne for the remainder of the year. That could not only cripple Fortescue but would also have BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) operating at extremely tight margins (notably, it would likely put their dividends at risk, too).
Although Fortescue's shares might look appealing in their current depressed state, there is a chance the stock will continue to plummet over the coming weeks and months. As such, Fortescue remains a bad option for investors. A much safer option than Fortescue Metals Group.
