Is Fortescue Metals Group Limited peering into the abyss?

The iron ore miner has hit a new 2014 year low.

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Iron ore miner Fortescue Metals Group Limited's (ASX: FMG) share price has sunk 25% to a new 2014 calendar year low of $4.37. The fall in Fortescue's shares is in response to the plunging iron ore price which is also down 25% this year to $100 per tonne.

Other smaller, more exposed iron ore miners have fared even worse than Fortescue; while mining giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have fared much better with falls of 1.5% and 12%, which highlights the benefits of a diversified asset base. In comparison the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 1% for the year.

Having already suffered a 25% drop in its share price, the question for investors to ask themselves now is whether they should be selling too, or if the worst of the declines have passed?

There are at least two reasons for investors to keep holding their shares.

Firstly, on previous occasions iron ore has failed to stay below the $100 per tonne level for long, this is partially believed to be due to the high cost of domestic Chinese supplied iron ore. Assuming the bulk metal again finds buying support at these levels then the worst of the falls would indeed appear to have already occurred.

Secondly, Fortescue is still profitable at these levels and should remain so as long as the iron ore price is above $70 per tonne. Assuming the per tonne iron ore price in the long term is above $70 then Fortescue will remain a profitable business.

It's not the first time that Fortescue's shareholders have been faced with an uncertain outlook and it probably won't be the last; while in the near term, volatility could send the share price lower – possibly even back towards its 52-week lows. On balance and assuming an average price of $100 per tonne for iron ore in 2014 then much of the decline would appear to now be factored into the current share price.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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