Shareholders of Fortescue Metals Group Limited (ASX: FMG) have been offered some reprieve today. After having plummeted almost 66% over the last 12 months in the wake of the crashing iron ore price, the stock managed to reclaim 5.4% to be trading at $1.955 late in the session.
Earlier in the day, the miner released its March quarterly production report which yielded far greater results than the market had been expecting. While many analysts had suggested that the iron ore price had already slipped below Fortescue's 'breakeven' level, the miner reiterated that it still remained profitable.
During the period, Fortescue Metals Group shipped 40.4 million tonnes of ore at an average cost of US$34 a tonne, while it also increased its cash balance and reduced operating costs further. This was partially driven by the weak Australian dollar and lower fuel prices.
While the market is clearly pleased with the company's efforts; investors need to keep in mind that iron ore prices are widely expected to fall further. While the commodity is currently trading above US$50 a tonne, according to the Metal Bulletin, Goldman Sachs believes it will trade for US$40 a tonne in 2017 while the Australian government and Citi both believe it will fall below that price this year.
Should that scenario play out, it will be increasingly difficult for Fortescue to keep its head above water, while it could also become near impossible for it to repay its US$7.4 billion in net debt, much of which will fall due between 2017 and 2019. As such, Fortescue remains a risky prospect and investors may want to consider today's resurgence as an opportunity to sell, or at least reduce their exposure to the stock.
A much safer bet than Fortescue Metals Group
