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Fortescue Metals Group Limited shares hit 2014 low

Iron ore miner Fortescue Metals Group Limited (ASX: FMG) shares have continued their slide, hitting $4.53, the lowest price this year, as iron ore prices drop and Chinese steel futures fall to a record low.

At the close, Fortescue shares were down 2.6% at $4.58, well off the highs of $6.22 reached in February this year. Weak steel prices are weighing on the iron ore price, which slipped another 0.7% overnight to US$102.80 a tonne.

Speaking at an investment conference in Hong Kong in March this year, Fortescue CEO Neville Power said, “There will always be short term volatility but not anything that we are concerned about long term. The key with all of these resource projects is being well positioned on the global supply curve. We are very comfortable with how we are positioned. A $US100 a tonne iron ore price or sub $US100 a tonne is ok, particularly if we repay debt.”

Some analysts have suggested that the company’s breakeven price was around US$70 a tonne, while junior iron ore miner Atlas Iron Limited (ASX: AGO) was estimated to be around US$90 a tonne. Another junior miner, Mount Gibson Iron Limited (ASX: MGX) has even higher production costs, but a substantial bank balance approaching $500 million, which should allow the company to continue operating until prices recover.

Australia’s largest iron ore miners Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have among the lowest costs in the world, estimated in the US$40 – US$50 per tonne range. While they will still be profitable even at very low iron ore prices, profits will be slashed dramatically, despite both companies increasing production to compensate.

The concern for Fortescue is, as usual, its large levels of debt. At previously high iron ore prices the company has generated enough cash flow to prepay some debt, but it still has a substantial amount on its books as well as a whopping interest bill. It’s perhaps no wonder then that investors are abandoning ship.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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