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Fortescue Metals Group Limited plunges: should you be worried?

Fortescue Metals Group Limited (ASX: FMG) has been extremely volatile of late, giving shareholders some nervous days when intraday losses tallied over 10%. This week has been no exception, on Tuesday the company’s share price was over 10% higher intraday but finished only a few percent stronger, while on Wednesday a 3% rise at midday turned into a 1% loss by the end of the day.

Yesterday, Fortescue shares were over 5% lower in morning trade and fell a further 1% after the company confirmed an eighth consecutive record production report for the three months to 30 September.

Should you be worried?

The reason for the share price fall, as far as I can tell, is a combination of the iron ore price falls, the Australian dollar rising yesterday, and short-term speculators exiting the stock after a strong few days.

Over the medium term economists expect the iron ore price to remain around its current price of $82. At $82 Fortescue is mildly profitable but earnings and dividends will be far lower than in previous years. The falling iron ore price is clearly the reason for the plunge in the company’s share price from $5 only 3 months ago to $3.43 yesterday, and will likely constrain any recovery.

As a shareholder, I am slightly concerned at the current share price but believe that Fortescue will survive. Profits will fall but I expect the company to continue cutting costs to lower its breakeven cost over time.

Seeing as Fortescue is growing production I'm much happier owning it than one of our big four banks. The incredible bull market in bank shares could be ending. Find out all the details you need to know in The Motley Fool's newly updated report, "What Every Bank Shareholder MUST Know". Your copy is FREE when you click here now.

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

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