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Why Fortescue shares are going gangbusters today

Credit: Chatham House

Shares in iron ore miner Fortescue Metals Group Limited (ASX: FMG) rocketed towards a 52-week high today as iron ore prices continue to rebound from multi-year lows over the past month.

Fortescue shares are up 3.7% to $2.49 today, while shares in BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are up 2.6% and 1.8% respectively, as the iron ore majors enjoy some respite from an iron ore bear market that has savaged their profitability and shareholder returns.

Among the large Pilbara miners, Fortescue carries the most risk due to its $6.1 billion net debt pile, although it probably offers the most upside if Chinese demand for iron ore starts to surge again and iron ore prices catch an updraught.

The miner posted half-year underlying EBITDA of US$1.3 billion, with cost guidance improved to just US$13 per wet metric tonne by the end of financial year 2016 and if it is able to aggressively pay down its debt pile on strong cash flows the stock may still have a bright future.

Iron ore prices softened throughout 2015 from what were ‘super-cycle’ boom-time prices driven by a once-in-a-generation Chinese demand for the commodity used in the steel required for an unprecedented construction boom.

Any sign that Chinese demand for iron ore is surging again will light a fire under Fortescue’s share price, although the general consensus is that iron ore prices are likely to stay lower for longer on rising supply and softening demand.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned. 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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