While the ASX has managed to regain a little over 1% today, shares of Fortescue Metals Group Limited (ASX: FMG) are once again trading in the red. They're down 1.1% after the iron ore price fell 1.6% overnight.
Long-time shareholders of Fortescue Metals Group will be overly familiar with this feeling – watching the market go up while their shares fall in value. Indeed, this has been the result of a massive increase in global iron ore supplies which, when combined with slowing demand growth, has had a drastic impact on the commodity's price.
Fortescue's shares have regained nearly 15% over the last month or so to trade at $1.81 as at yesterday's close, but they're still sitting heavily in the red for the last five years. This is demonstrated on the chart below:
If you had invested $10,000 in Fortescue Metals Group shares in September 2010, those shares would be worth just $3,591 today, according to my calculations. Throw in some dividends paid along the way and you'd be sitting on a negative 54.2% return, worth just $4,583.
By comparison, the same amount invested in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) would be worth a far more respectable $13,522 – a return of 35.2%.
Unfortunately, I don't believe the future will get any better for Fortescue. Indeed, iron ore is currently trading for US$55.30 a tonne, according to The Metal Bulletin, but most analysts believe it will fall well below that level in the coming months. Given Fortescue's lower grade ore and enormous debt load, that could prove catastrophic for Fortescue's earnings capacity and ability to repay its loans.
Even at $1.81 a share, I believe investors would be wise to continue avoiding the stock.
