Fortescue Metals Group Limited shares go nuts on improved forecasts

Credit: iStock

In morning trade Fortescue Metals Group Limited (ASX: FMG) has been the best performing share on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) with a gain of over 6% to $4.37. The sharp rise in the iron ore miner’s share price comes following the release of its fourth quarter production report.

Another strong quarter for the company saw shipments of 43.4 million tonnes of iron ore with cash production costs of US$14.31 per wet metric tonne. This is a 2% increase in shipments over the fourth quarter of FY 2015, but a huge 35% reduction in cash production costs.

This resulted in an impressive tenth consecutive quarter of cost reductions, which in my opinion demonstrates just how effective the company’s focus on productivity and efficiency has been.

The great news for shareholders is that management expects this focus will drive cash production costs even lower in FY 2017. It provided FY 2017 cash production costs guidance of between US$12 and US$13 per wet metric tonne on forecast shipments of between 165 million to 170 million tonnes.

If it can deliver on its cash production costs guidance it would potentially put its costs below industry leader Rio Tinto Limited (ASX: RIO). This would be some achievement and a real testament to the hard work management has put in.

During the quarter management has strengthened its balance sheet further. It repaid US$1.7 billion of debt, bringing total debt repayments in FY 2016 to a massive US$2.9 billion. Although the miner still has considerable debt outstanding, it does have a very healthy US$1.6 billion of cash on hand.

Overall I feel this was yet another positive result for the iron ore miner, and moving forward if iron ore prices remain at the current levels then I believe Fortescue Metals is poised to profit greatly.

But unfortunately opinion is largely divided on the future direction of iron ore prices. With some predicting demand from China will collapse in the second half of the year now might not be a great time to invest, despite how tempting it may be.

Instead of investing in Fortescue Metals I would highly recommend taking a look at these three fantastic shares instead. Each pays a solid dividend and could climb higher in the months ahead.

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Motley Fool contributor James Mickleboro 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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