3 reasons why the Fortescue Metals Group share price could soar from here

Fortescue Metals Group Limited (ASX: FMG) has seen its share price double since the start of this year – for a number of reasons.

And the share price continues to hit new 52-week highs – currently $3.89 – after rising more than 7% yesterday.

Here are 3 reasons why the shares could continue to push beyond $4.00…

Iron ore price

The iron ore price is now trading around US$56 a tonne, after surging 3.5% overnight, according to Metal Bulletin. There are signs the commodity price has stabilised – the spot has stayed above US$50 a tonne since mid-June. Rio Tinto Limited’s (ASX: RIO) to shelve its giant Simandou iron ore mine in Africa probably helped lift prices yesterday.

There remains the risk that more supply coming onto the market depresses prices, but for now, Fortescue is making hay while the sun shines.

Lower production costs

Fortescue said in May 2016 that it was targeting cash costs of US$13 a tonne for June 2016. In 2012, Fortescue had cash costs of US$50 a tonne – with total costs of US$68 a tonne. That’s an astonishing and remarkable achievement. If Fortescue can maintain such low production costs, there’s no reason why the company can’t continue to make a profit – and pay out dividends.

Debt dramatically reduced

Fortescue has repaid billions off the mountain of debt it took on to fund the development of its mines, including US$2.3 billion in the 2016 financial year. In May, the company had just US$5.9 billion of net debt – but that was before it announced a further US$500 million early repayment of more debt. As the miner repays more debt, it increases savings from interest expense – giving Fortescue bigger profits.

Foolish takeaway

It all adds up to higher earnings and likely dividends too. And the primary factor driving share prices is earnings. There’s no reason why Fortescue could see it share price starting with a 4 by the end of this year.

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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

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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