Fortescue Metals Group Limited (ASX: FMG) has done a fantastic job at reducing costs and improving productivity, but it seems that its efforts may be too little too late with several analysts expressing their concern over the stock.
The miner's shares have come under enormous pressure over the last 15 months, in which time the iron ore price has declined nearly 60% to just US$57.66 a tonne, according to the Metal Bulletin. Fortescue's shares have been hit even harder to be trading 66% lower at $2 per share.
Although Fortescue is the world's fourth largest iron ore miner, behind Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Brazil's Vale, its operating costs remain significantly higher making it difficult to turn a profit in this low price environment. To make matters worse, Fortescue also carries an enormous pile of debt which is becoming increasingly difficult to repay as the iron ore price sinks.
As reported by The Australian, Morningstar's Matthew Hodge told clients the stock was under review while he expected to reduce his fair value estimate of the company by around 20%, reiterating that he does not believe the miner enjoys a cost advantage over smaller miners. He said, "Fortescue is a very high-risk proposition, highly leveraged to iron ore and with significant debt at the wrong point in the cycle."
It should also be noted that Fortescue generated a whopping 96.3% of its revenue from China in 2014. While its heavy reliance on China obviously paid off during the 'boom' years, China now anticipates growth of just 7% which poses as a risk for the miner.
Should you sell Fortescue Metals Group?
From its recent profit announcements, it's clear that Fortescue Metals Group and its management team are doing all they can to cope with the low-price environment. In saying that however, their efforts haven't been enough to prevent a massive decline in profitability.
Although the miner's shares might look 'cheap' right now at $2, they are cheap for a reason. Iron ore prices are expected to continue falling over the next 12 months which could bulldoze Fortescue's profits altogether, making it impossible to repay its debt load. Fortescue remains a highly risky investment prospect and investors still holding the shares could suffer plenty more pain in the coming months or years. If it was me, I would strongly consider selling my shares to invest in a safer and more promising business.
