In response to Fortescue Metals Group Limited's (ASX: FMG) stronger-than-expected quarterly production update, three investment banks have upgraded their views on the stock, despite the strong headwinds facing the iron ore industry.
On Thursday last week, Australia's third largest iron ore miner said that its breakeven cost was US$39 a tonne – a level much lower than what most analysts had expected. Many had assumed that the miner was already operating at a loss but greater operational efficiencies, together with a lower Australian dollar and oil prices have helped it improve considerably.
At the same time, it managed to stash away an additional US$200 million in cash, strengthening its balance sheet position and reducing its net debt to US$7.4 billion.
In response, UBS raised its price target by 13% to $1.70 while Morgan Stanley lifted its target from $1.65 to $2.14. Bell Potter went one better, upgrading the stock to "buy" from a "hold" position whilst also providing a $2.48 price target on the stock.
Should you buy Fortescue Metals Group?
Fortescue Metals Group's latest report may have helped it gain a few more friends but the facts remain the same. As miners such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) continue to ramp up their production efforts, iron ore prices will continue to fall while the margins recognised by miners will continue to narrow.
As such, the miner finds itself in a race against time to continue reducing costs whilst also repaying its debt load – most of which will fall due between 2017 and 2019. Although the shares could thrive in the event that iron ore prices experience a miraculous recovery, that is a big gamble and one that Foolish (capital 'F') long-term investors would be unwise to take.
