Fortescue Metals Group Limited's (ASX: FMG) shares are up 1.9% today, trading at $4.84 in mid-afternoon trading.
In comparison, the S&P/ASX 100 Index (Index: ^XTO) (ASX: XTO) struggling to post a positive day, currently down 0.1%, and likely to finish the day in the red.
Over the past week, Fortescue's shares have climbed more than 5%, with iron ore prices appearing to stabilise at just above US$90 a tonne.
At the same time, the iron ore miner has entered the shipping business, with the order of 8 very large ore carriers, which should further reduce the company's costs of getting ore to its primarily Chinese customers. The ships are designed specifically for Port Hedland and to maximise outputs from the company's berths. Fortescue will pay cash on delivery, with the total cost coming out to US$550 million, and the first ship is expected to be delivered in late 2016.
The company also says the purchase won't affect its strategy of paying down more than US$7 billion in debt.
During the 2014 financial year, Fortescue shipped more than 124 million tonnes of iron ore, and is predicting to ship between 155 million and 160 million tonnes of iron ore in the 2015 financial year. Fortescue missed its own guidance, but did say that it had set itself a 'stretch' target for the last quarter, and narrowly missed it.
CEO Nev Power is as positive as ever, recently noting that higher cost producers were still in the market, but as they leave, the supply/demand equation will rebalance. Many of China's iron ore producers have all-in costs well above the current price, while Fortescue is estimated to have all-in costs of above US$70 a tonne. That's still a fair way ahead of the leading iron ore producers, Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Brazilian giant Vale, with their estimated costs of between US$40 to US$50 a tonne.
Fortescue may well be a bargain at these prices. But there are a couple of key risks, including the iron ore price crashing down, and Fortescue unable to meet its interest and debt repayment schedule.
