Shares of Fortescue Metals Group Limited (ASX: FMG) have enjoyed a remarkable run over the last month or so. Since hitting a low of just $1.44 on 21 January, the shares have risen more than 45% to $2.09, putting them near their highest price since November.
The sharp rally has largely come about due to the rebounding iron ore price, which has surged from a six-year low around US$38 a tonne late last year to US$51.64 a tonne overnight, according to data from The Metal Bulletin.
This rally has also helped spur demand for shares of other miners as well, including BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), with investors growing increasingly confident that the commodity may have finally found a floor. Indeed, it’s also likely that investors were impressed by Fortescue’s latest earnings results, which it released to the market yesterday.
One of the biggest concerns surrounding Fortescue’s shares in recent years has been its enormous debt pile, which would become increasingly difficult to repay as the iron ore price falls. Thanks to some excellent cost cutting initiatives however, Fortescue managed to repay more than US$1.1 billion in debt during the period. It’s still in a huge net debt position of US$6.13 billion, but it’s gradually cutting that down and thus, reducing the risks surrounding the business.
Meanwhile, it also reported a breakeven price of just US$28.80 a tonne, making it one of the lowest cost producers in the world. That’s certainly a feat you want to have in this low price environment.
Now, I’ll admit that I’ve been surprised by Fortescue’s ability to cut costs and improve its corporate position, and management get a huge amount of credit for implementing those initiatives. What I am concerned about, however, is that the iron ore rebound mightn’t be sustainable.
The fact is, the world’s biggest producers are still producing a record amount of product for a market which, at the same time, is experiencing slowing demand growth. Although prices have risen recently, that isn’t guaranteed to continue and if prices do fall again, it’s likely that investors will sell the miners just as quickly as they bought.
Indeed, Fortescue is doing a great job at the minute, but investors need to ask themselves whether they think the current iron ore price can be sustained. If they think otherwise, they may want to think twice before buying shares of Fortescue.