What’s behind the extraordinary trading in Fortescue Metals Group shares?

Fortescue Metals Group Limited (ASX: FMG) has seen its share price board a rollercoaster yesterday afternoon, soaring more than 20% yesterday, before rising again at the start of trading today, and in late afternoon trading is down just over 8% at $2.83.

Where or when the rollercoaster will stop no one knows.

Fortescue’s share price was trading flat at around $2.82 until around 3 pm yesterday afternoon, when shares spiked higher to $3.29 and closing the day at $3.08. The reason for the spike has been put down to iron ore futures soaring yesterday afternoon, short covering (more on that below) and the iron ore price rallying the previous night.

Other iron ore miners spiked too

Other junior iron ore miners saw their share prices jump yesterday as well, after the spot iron ore price jumped 5% overnight to US$53.75 a tonne, as we reported yesterday morning.

The different between the movement in Fortescue’s share price and the other miners was that it fairly flat for most of the day, whereas the likes of BC Iron Limited (ASX: BCI) and Atlas Iron Limited (ASX: AGO) saw their share prices soar as soon as trading began, and stayed high.

Both BCI Iron and Atlas did see their share prices jump after 3 pm, following Fortescue’s share price.

Questionable trading?

However, questions are now being asked over the trading in Fortescue shares, following the company’s announcement this morning of a memorandum of understanding (MOU) with Brazilian iron ore giant Vale. The deal is expected to see the two combine their ores at selected ports in China to take advantage of differing ore qualities, and could see Vale take a minority stake in Fortescue of between 5% and 15%.

Were some people aware of the MOU before it was announced to the ASX this morning? It appears to be the case, with the Australian Financial Review’s (AFR) Street Talk column reporting last night (at 9.44pm) that a potential deal was in the works. And if journalists knew something was in the works last night, the question is – how much did they know and who else knew?


I’d like to state right here that it’s highly likely that there was nothing untoward in trading in Fortescue’s shares yesterday. The company had attracted the attention of plenty of shorters (who bet on the share price falling) who would have been forced to buy shares to cover their positions as the share price rose on the back of the iron ore futures. That action tends to magnify share price moves. Indeed, Fortescue’s CEO Nev Power has put the share price spike down to ‘short-covering’.

The AFR reports that the ASX has written to the company seeking an explanation, but the horse has already bolted and it’s unlikely that Fortescue will have anything useful to add.

Additionally, in Fortescue’s original release to the ASX, the company said Vale might take a small stake in the company, but Mr Power reported via an interview that it could be up to 15%. That fact was deemed to be market sensitive and non-public, so trading in Fortescue shares was suspended temporarily until the company had a chance to issue a clarifying statement.

Foolish takeaway

It should be fairly simple for the regulators to analyse trading in Fortescue’s shares yesterday. The Australian Securities and Investment Commission (ASIC) says it closely reviews all trading ahead of material announcements. What investors would really like is the ‘all clear’ signal from the regulator – and not a vacuum with no news.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia 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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