Here’s why Fortescue Metals Group Limited shares were crushed yesterday

Shares of Australia’s third largest iron ore miner, Fortescue Metals Group Limited (ASX: FMG), fell in dramatic fashion on Thursday as the iron ore price tumbled to its lowest level in more than five years.

As the spot iron ore price plunged to just US$76 a tonne – down a shattering 43.7% since the beginning of the year – Fortescue’s shares took a turn for the worse. They declined by 8.5% to finish the session at a fresh 52-week low at just $3.03. Their previous low was at $3.15.

If you can’t bear any more bad news, I would suggest you stop reading now…

Because it looks as though the iron ore price has even further to tumble. Until this point, a number of analysts had suggested that the commodity’s price could fall to just US$75 a tonne at some point this year. But now, The Fairfax press has reported that Chinese traders are expecting the spot price to fall even further – possibly as low as US$70 a tonne.

The nation’s smaller miners with higher operating costs will definitely be stressing over this news. Shares of Atlas Iron Limited (ASX: AGO) and BC Iron Limited (ASX: BCI), for instance, crumbled 16.7% and 5.1% yesterday, taking their total loss over the last three-and-a-half weeks to 47% and 48% respectively. At US$70 a tonne, both could be struggling to turn a profit.

While Fortescue maintains far lower cost operations, it is likely that investors are mainly concerned about its considerable debt level. As the iron ore price drops, its ability to pay off that debt declines. As at 30 September 2014, the company’s net debt was sitting at US$6.9 billion, down US$3.6 billion compared to its net debt in November 2013.

Although Fortescue might look like a cheap investment prospect, I believe it’s one for Foolish investors to avoid – for now at least. Should the iron ore price fall as heavily as Chinese traders are expecting, I would suggest Fortescue’s shares could follow suit.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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