Shareholders of mining heavyweight Fortescue Metals Group Limited (ASX: FMG) have been given plenty of reasons to smile today, not least because the stock itself surged by as much as 15% earlier in the session.
After having closed at $2.17 on Monday, the stock surged to a near two-week high just below $2.50 per unit, before easing back to $2.37 a 9.2% lift, which compares to the 0.7% rise recorded by the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Here are three reasons why the stock is on fire today.
- The first and most obvious reason can be attributed to reports made by the Fairfax press which stated that Australia's Foreign Investment Review Board, or FIRB, had received a number of applications from foreign entities interested in acquiring a stake in the business. Although Fortescue has since announced that it is not aware of any FIRB applications by third parties, the news has still created a spark amongst investors.
- Following a strong surge during April, most analysts expected the iron ore price to retreat heavily, possibly falling below its recent 10-year low at around US$47 a tonne. However, the commodity has thus far managed to defy those expectations as it regained another 2% overnight to trade at US$61.18 a tonne, according to the Metal Bulletin.
- The US Federal Reserve has stated that it still expects to raise interest rates this year, which would act to strengthen the US greenback. Given that iron ore is quoted in terms of US dollars, the producers of the commodity benefit when the local currency weakens. While some analysts believe the Australian dollar will be worth just US73 cents by the end of the year (down from its current US78.33 cent level), others believe it could fall even further.
Although the prospect of a foreign entity taking a bite of Fortescue might seem appealing right now, investors should not base their investment decisions around such speculation. Indeed, holders of Fortescue Metals Group shares could even look to use today as an opportunity to sell out of their position with most signs suggesting further pain for the iron ore price in the near future.
Investors would be wise to focus their attention on other less risky investment prospects which still have the potential to generate significant returns over the coming years.
