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Why Fortescue Metals Group Limited shares tumbled today

Credit: Chatham House

Shares of Fortescue Metals Group Limited (ASX: FMG) have fallen 3.4% today, which is heavier than the falls experienced by rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) thus far.

After the market closed yesterday afternoon, the miner provided investors with a brief update regarding its annual production. It said it had shipped 169.4 million tonnes (mt) during financial year 2016, which compares to its previous guidance of 165mt provided in February.

However, the miner has been expected to exceed that target since April when it announced that shipments were running ahead of target — an achievement that it attributed to mild weather experienced during the March quarter. At the time, it said “potential upside to the full year guidance remains subject to the impact of weather during the June quarter.”

It’s possible that investors had hoped for a greater guidance beat given how strongly the shares have risen recently.

Even with today’s decline, Fortescue’s shares have skyrocketed 127% since the beginning of the year and are currently trading near a two-year high as a result of a rebounding iron ore price, together with a strengthened balance sheet.

Thanks in large part to operational improvements, the miner has repaid a considerable amount of debt, including a US$500 million repayment in June which will generate interest savings of US$21 million per year.

Fortescue’s management team deserve recognition for their ability to steer the company through what has been a very tough period for the industry as a whole, but an investment in the miner is still not without risk.

According to The Metal Bulletin, iron ore is currently fetching around US$59 a tonne which many economists believe is unsustainable. Given Fortescue’s heavy reliance on the commodity for its revenue and earnings, a sharp fall in the iron ore price would not bode well for the miner or its shareholders.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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