Having previously been a fairly long-term shareholder of Fortescue Metals Group Limited (ASX: FMG) I’ve been used to observing a wildly fluctuating share price, however the most recent rally has really taken me by surprise.

Here’s a summary of what’s happened over the last few years:

2013

The iron ore price rallies hard in the middle of the year from around US$110/tonne to US$140/tonne.

Fortescue’s share price rallies from $3 to $6 over the same period as group profitability soars and management pushes for further expansion.

2014

The iron ore price starts its inevitable descent from over US$140/tonne to end the year at around US$70/tonne.

Fortescue’s share price falls from $6 to end the year at $2.83, despite many investors saying that the company could fail at prices below US$70/tonne.

2015

The iron ore price continues its downwards spiral, dropping to a low of US$37/tonne in December 2015, before recovering to end the year in the low US$40’s.

Fortescue’s share price falls to $1.83 at the end of the year as the company focusses on cutting costs, but the market isn’t convinced.

2016

The iron ore price recovers a little to average around US$55/tonne over the year, closing above US$60/tonne last week.

Fortescue’s share price SURGES from a low of $1.44 in January to a high of $5.34 in late October, as the company successfully cut costs to remain quite profitable despite a significantly lower received price per tonne of ore.

What happens now?

Well, as far as I can tell, the main difference between the $6 a share Fortescue in 2014 and the $5.34 a share Fortescue in 2016 is that the company’s:

  • debt load has reduced from US$9.9 billion (end 2013) to US$4.2 billion (last week)
  • production has increased to 165 million to 170 million tonnes in 2016 (forecast), compared to 81 million tonnes in the 2013 calendar year
  • C1 costs dropped massively from US$44 per wet metric tonne to US$13.55 per wet metric tonne

Analysts are predicting earnings per share of 52 cents for the year to 30 June 2017, compared to 93 cents in the 2014 financial year (ending June 30 2014). That means that even at its peak share price, investors were still only paying a forward price to earnings ratio of 6.5 in 2015, compared with 10.2 now.

Should investors pay such a premium when noting that the company still had net debt of 25% of its current market capitalisation and 50% of its market cap in May this year, when the the iron ore price was around US$55 per tonne?

If I were still a holder, I would prepare for a volatile end of the year!

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Motley Fool contributor Andrew Mudie 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.