Fortescue Metals Group Limited (ASX: FMG) has rebounded more than 10% since hitting a new six-year low of $1.61 late last week, giving some shareholders an element of hope that the worst might finally be over for the embattled iron ore miner.
Indeed, Fortescue has been one of the market's worst-performing stocks over the last 12 months. The stock has fallen 59% in that time compared to a 2.3% gain from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), while it is down more than 71% since March 2014.
There are a number of contributing factors behind Fortescue's nosedive, with the most obvious being the headwinds facing the iron ore industry. The commodity itself has lost almost two thirds of its value since January 2014 to trade at just US$50 a tonne, which impacts the returns earned by all mining corporations.
Of course, Fortescue is in a better position than a number of Australia's other iron ore producers to weather the storm, but there is reason to believe the pain could get even worse for Fortescue from this point onwards.
Here are four reasons you should consider selling, or otherwise continue to avoid Fortescue Metals Group:
- Fortescue is the world's fourth-largest iron ore miner, and the third largest in Australia. While it maintains lower cost operations than most other miners around the world, its breakeven price is considerably higher than those enjoyed by rivals Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Vale.
- In a low price environment, high-cost ore is simply being replaced by lower-cost production, thus putting even more pressure on operators such as Fortescue. This was demonstrated by Vale most recently when the miner said it would scrap 30-million tonnes of high-cost ore, only to replace it with cheaper production to ensure its long-term production targets are still met.
- At the same time as low-cost output is increasing, Chinese demand growth is deteriorating, fast. This will only push the iron ore price down even further, with some experts forecasting a fall below US$40 in the second half of this year.
- Fortescue Metals Group maintains a mountain of long-term debt which will become increasingly difficult to repay as the iron ore price falls. If it cannot service this debt, then investors should expect to lose a lot more than they already have on their investment.
Investors need to remember that just because Fortescue is already down more than 70% since early last year, it can still lose a maximum of 100% from today's price. Although I am not speculating that will necessarily happen, it is certainly a risk investors need to acknowledge.
Given the headwinds facing the industry, investors would be wise to ignore Fortescue at its current price and focus on some of the market's more attractive alternatives.
