While the Australian share market has retreated nearly 0.6% today, dragging most of Australia's blue chip stocks down with it, Fortescue Metals Group Limited (ASX:FMG) has managed to buck the trend, rising 9 cents or 3.3%.
Shares of Australia's third largest iron ore miner have traded between a low of $2.31 and a high of $6.22, recorded in February. Now priced at $2.82, the stock is down 54% since that high while it is 22% above the low it recorded earlier this month.
Indeed, it's been a woeful year for Fortescue's shareholders. As a pure iron ore play, Fortescue's shares are highly leveraged to the iron ore price which has dropped 49% since the beginning of the year. The commodity regained US$1.37 overnight to change hands for US$68.71 a tonne, which would explain the rally in the share price today.
Although the stock might appear to be very cheap right now, investors need to be wary of the commodity falling even further in price and how it will impact the miner's shares. Firstly, some analysts expect the commodity to fall below US$60 a tonne in the New Year which could make Fortescue's operations unprofitable. In addition, Fortescue carries a heavy debt load which it will struggle to repay should the commodity fall any further. This could also impact the miner's dividends in the short- to medium-terms.
Rather than taking an unnecessarily high level of risk on Fortescue, there are plenty of other great ASX stocks which are also trading at extremely compelling prices.
