Could the Fortescue Metals Group Limited share price hit $1?

Credit: Chatham House

The Fortescue Metals Group Limited (ASX: FMG) share price plunged more than 3.6% lower today, reaching a low of $1.44.

Source: Google Finance

Source: Google Finance

The last time Fortescue’s share price traded below $1.44 was November 2008, during the depths of the Global Financial Crisis (GFC). Indeed, today’s fall to a seven-year low takes Fortescue’s 2016 share price falls to 21% – and we haven’t even got to February!

Why is it falling?

Fortescue’s dramatic share price fall can be attributed to the material decline in iron ore prices since the GFC. In fact, since February 2011, iron ore prices have fallen from over $US180 per tonne to just $US41 per tonne. Iron ore is a steel-making ingredient.

A falling iron ore price puts pressure on Fortescue’s share price because it means lower sales revenue and profits. However, it’s important to note that Fortescue is heavily leveraged to the iron ore price since it had around $US9.5 billion of debt on its balance sheet at June 30 2015 (some debt has been repaid since then and the company has a decent wad of cash).

Indeed, Fortescue’s market capitalisation (which is equal to the number of shares multiplied by share price) was $4.59 billion today. That means its debt could be worth double that of its shares. Remember, if Fortescue was to collapse, its debt investors would get their money before equity (share) holders would get theirs.

Foolish takeaway

Could the Fortescue share price hit $1? While I won’t guarantee it will fall that low, there’s nothing to say it can’t sink below $1.

Indeed, with iron ore prices plummeting and a debt-laden balance sheet, I’m certainly not a buyer of Fortescue shares today – even if they are at a seven-year low.

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Motley Fool writer/analyst Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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