Shares in Fortescue Metals Group Limited (ASX: FMG) fell a further 1.5% last week, closing down 7c at $4.51. Unfortunately, that fall is dwarfed by the miner's overall drop since the beginning of the year with shares having plunged 22.5% compared to the S&P/ASX 200 Index's (Index: ^AXJO) (ASX: XJO) 2.6% gain.
To make matters worse, there could well be much further to go. Here are three reasons why the shares are falling, and why you should continue to avoid the stock…
1. We Fools like to take advantage of quality stocks when they are trading at unappreciated prices. Unfortunately, in Fortescue's case, I still don't think there's a solid enough case to buy just yet. Sure, it's one of Australia's largest iron ore miners behind BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), but its lack of diversification makes it far too risky for my liking.
2. Speaking of lack of diversification, that's why the stock has been so susceptible to the falling iron ore price. The commodity is down almost 30% since the beginning of the year at around US$98 a tonne and is extremely volatile.
3. Meanwhile, the company is ramping up its production levels as it anticipates strong demand from China to continue well into the future. This will only push the iron ore price even lower which will impact on Fortescue's margins. In fact, various analysts are forecasting it to fall as low as US$80 a tonne over the coming 12 months.
A better ASX pick than Fortescue
Should iron ore soar in price, Fortescue's shares could well recover strongly. Unfortunately, I don't see the merit in taking that risk – especially when there are other fantastic opportunities to take advantage of instead.
