Is Fortescue Metals Group Limited a $6 stock?

Could the Fortescue Metals Group Limited (ASX:FMG) share price hit $6.00?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Fortescue Metals Group Limited (ASX: FMG) share price is up slightly today at $4.95 and has already cracked the $5 mark today.

Is the next stop $6?

It's almost hard to believe that the share price was at a five-year low of $1.44 as recently as January 2016 – which was the lowest level since the depths of the GFC.

But a combination of much lower production costs, a recovery in the iron ore price, and ongoing debt repayments has Fortescue sitting pretty currently.

Production costs

In the 2014 financial year, C1 production costs were US$34 per wet metric tonne (WMT). That was down 23% over the previous year. Total delivered cost was US$52/wmt.

In 2015, C1 cash costs were down another 21% to US$27/wmt.

In the 2016 financial year, C1 cash costs dropped 43% to US$15.43/wmt and Fortescue's cash costs now rival those of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) – the lowest cost producers in the world. Total delivered costs were US$23/wmt in FY16.

Iron ore price

The iron ore price averaged US$96 a tonne in 2014, dropping to US$55 a tonne in 2015. The current spot price is around US$58 a tonne, but it did briefly dip below US$40 a tonne in December 2015.

Fortescue saw an average realised price of US$45.36/dry metric tonne – around 88% of the average benchmark price, indicating the company still gets a discount price for its ore.

Debt

In FY 2014, Fortescue had repaid US$3.1 billion of its debt and had committed to a further US$0.5 billion. That had saved the miner more than US$330 million in interest costs a year. By the end of the 2015 financial year, Fortescue had repaid US$4.1 billion.

By the end of FY2016, net debt was down to US$5.2 billion – including $1.6 billion in cash, and Fortescue announced last week that it was repaying US$700 million of a 2019 term loan.

Outlook

Fortescue expects to ship between 165 and 170 million tonnes of iron ore in the 2017 financial year at an average C1 cost of US$12 to US$13/wmt. The company is still awaiting the delivery of a number of very large ore carriers (VLOC), which could see the company further cut its delivered cash costs.

To see its share price hit $6, Fortescue will likely need to increase its earnings per share – as it is currently trading on a P/E ratio of around 11x. That's not expensive, but the market is unlikely to rate the company higher in the short-term.

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »