What: Fortescue Metals Group Limited (ASX: FMG) shares surged 4% on Monday morning to hit a high of $2.72, a level not seen since December last year.
Why: As the highest cost major Australian iron ore producer, Fortescue's profit is largely based on the global iron ore price and the Australian dollar. The iron ore price rose approximately 1.5% over the weekend, potentially boosting Fortescue's profits for the year ending 30 June 2015.
While a 1.5% rise may seem small, the rise from $62.29 to $63.21 per tonne could have a massive impact on Fortescue's profit. If the company's break-even price is, say, $55 per tonne, the 92 cent jump in the iron ore price actually increases Fortescue's profit on each tonne by nearly 13%.
As a result, a small rise in the iron ore price will have a large impact on Fortescue's share price.
What Now: Fortescue is set to report its earnings for the six months to 31 December on Tuesday 17 February. I wrote about what Fortescue shareholders should expect in an article last week. I expect we'll see either a big swing up, or a big swing down, depending on the result.
