Is Fortescue Metals Group Limited a bargain?

Are you missing out on a 5.8% yield from Fortescue Metals Group Limited (ASX:FMG)?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The iron ore price has plunged to lows not seen for years and pure-play iron ore miners are feeling the heat. Western Desert Resources has been forced to call in the administrators, unable to pay its bills with the price of a tonne sitting below US$85 and little relief in sight. To make matters worse, every day a new expert announces that the price could well fall further but should settle between $80 and $100 per tonne over the medium term.

Debt Concerns

Arrium Ltd (ASX: ARI), one of the smaller producers, is expected to mine iron ore at a loss and has announced a highly dilutive and earnings-per-share crushing capital raising that will more than double its shares on issue in order to pay down debt. Arrium's share price has plunged, but even miners with little or no debt have suffered.

Mount Gibson Iron Ore (ASX: MGX) has no debt but investors are so pessimistic that the company's cash balance accounts for 70% of its market capitalisation.

High-Cost Producers to Struggle

Analysts at Citi Group believe that all bar one of Australia's listed pure-play iron ore miners are currently operating at a loss. That company is Fortescue Metals Group Limited (ASX: FMG).

At the current price, Fortescue is expected to make between a 5% and 10% margin, however the equation is complicated by lower quality (grades) of ore mined by Fortescue, compared with giant rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

For a comparison, Rio and BHP are operating at 40% to 50% margins in their iron ore divisions!

100% fall in profit

The lower iron ore price is expected to result in many of Australia's smaller miners reporting a loss in the 2015 financial year, and will likely slow down debt repayment regimes being undertaken by Fortescue and BHP. Pleasingly however, Fortescue is in a much better position than previous years; it currently has cash of nearly $2 billion and the next major debt repayment is not due until 2016-17.

5.8% Yield and a PE less than 10

For Fortescue, analysts have revised down their profit and dividend expectations since the beginning of the year. However it could still deliver earnings per share of over 50 cents in FY15 and a dividend of 10 cents per share. Fortescue looks cheap based on these metrics, however a further fall in the ore price will be bad news for shareholders.

Motley Fool contributor Andrew Mudie owns shares in FMG. You can find Andrew on Twitter @andrewmudie

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »