Shares of iron ore giant Fortescue Metals Group Limited (ASX: FMG) have resumed their position in the red on Friday, more than reversing Thursday's gain of more than 5%.
So What: Fortescue's shareholders were given a brief sense of relief last Thursday after the miner delivered its March quarterly production report, revealing lower-than-expected costs and an additional US$200 million on its cash balance. Additionally, the iron ore price rebounded above US$50 a tonne, leading investors to believe a rebound was possible for the commodity.
Unfortunately, the jump in iron ore prices looks as though it could just be temporary with the commodity once again slipping below US$50 a tonne overnight, according to the Metal Bulletin. As Chinese demand growth slows and the world's largest producers (including Fortescue) continue to ramp up their production rates, it's likely that the commodity will slip further.
In fact, Goldman Sachs estimates that prices will average roughly US$44 a tonne in 2016, and US$40 a tonne in 2017. The government and Citigroup are even more bearish on the commodity, suggesting that prices of US$35 a tonne and US$37 a tonne are possible this year, respectively.
Now What: Although Fortescue's results may have been better than what the market had been expecting, the fact remains that it is a mining company left completely at the mercy of the iron ore price itself. Should iron ore continue to fall, it will only impact Fortescue's earnings further and make it increasingly difficult to repay its debts and to generate sufficient shareholder returns.
Investors left holding the stock may want to consider selling, or at very least limiting their exposure in the event that prices do fall further.
