Forge shares soar 456% – should you be buying?

Shareholders of engineering and construction company Forge Group (ASX: FGE) embraced the news that the company got the go ahead for more work at Gina Rinehart’s Roy Hill iron ore mine, located in Western Australia.

After opening at $1.10, the company’s shares soared as high as $1.96, before closing at $1.585 on Monday – a 54.6% increase for the day. Shares have now regained 456% since hitting a low of 28.5c late in November when the company ended its trading halt to reveal the total extent of losses on two of its power station projects. In total, the shares saw a 65% rise in value last week.

The company said that it had received formal notification to proceed with phase three of construction of Roy Hill’s $1.47 billion processing facility. The contract is Forge’s largest ever and is worth $830 million. Chief Executive David Simpson said that it underpins the company’s order book through to 2015.

Foolish takeaway

Forge shares might well be on the rise again but investors should remind themselves of the volatility and risks facing the sector. Others in the sector, including Ausdrill (ASX: ASL) and Boart Longyear (ASX: BLY) are also down significantly for the year, and conditions don’t seem to be getting any better as investment in the mining sector continues to decline.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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