Fortescue Metals Group Limited hits new low – Is it time to buy?

With the bottom falling out of the iron ore market, shareholders in the company that has built itself into the ‘third force’ in iron ore production in Australia, Fortescue Metals Group Limited (ASX: FMG), are faced with a share price below the $3 mark.

The $3 level is interesting as with the exception of during the global financial crisis (GFC) when the stock plunged from over $12 to under $2, the stock has only re-touched the $3 level on three occasions: namely in late-2012, mid-2013 and now.

With the iron ore price sinking to a fresh, new five-year low of just US$75 per tonne the question for investors and shareholders alike is whether it makes sense to currently own stock in Fortescue?

Despite the obvious headwinds, here are five reasons there could presently be more upside opportunity than downside risk…

  • Low cost producer – Costs declined by 23% in FY 2014 and in October 2014 the miner recorded C1 costs equating to just US$29 per wet metric tonne; meanwhile the all-in-cost-equivalent dry metric tonne is now approximately US$58.
  • Debt levels reduced – Fortescue reported an impressive debt repayment of US$3.6 billion over the course of FY 2014.
  • Volumes and profits jump – The group recorded a 57% increase in net profit after tax in FY 2014 and a 54% leap in volumes. The company now has an annualised production run rate of 172 million tonnes per annum.
  • Future proofing – Management has undertaken numerous projects to maximise the future potential of the group. Strategies include Autonomous Haulage Solutions (AHS). Currently there are 20 trucks operating under AHS, these trucks have hauled 27 million tonnes, improved safety performance and produced between 10% and 20% operational efficiencies.
  • China continues to grow – China continues to urbanise and set a growth target far above the growth rate of more developed nations. This growth implies that the long-term fundamentals of volume demand for iron ore remains positive.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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