Fortescue Metals Group share price soars

Fortescue Metals Group Limited (ASX: FMG) has seen its share price jump 24% today to $3.08, after iron ore prices gained 5% on Friday.

Since the start of this year, Fortescue’s share price is up 65%, including 62% in the last month alone. And all of that is on the back of the iron ore price, which is up 40% in less than three months, and last traded at around US$53.75 a tonne.

At those prices, Australia’s third-largest iron ore miner is making a profit – and a decent one at that. Fortescue recently reported a break-even price of US$28.80 a tonne, making it also one of the lowest-cost producers in the world.

But I doubt management are sitting on their laurels, and will still be feverishly working to cut costs even further. Fortescue has purchased a number of very large ore carriers (VLOCs) with the first due for delivery later this year – which should help it lower costs again.

For the six months to December 2015, Fortescue reported a net profit of US$319 million, but operating cash flows of US$1,388 million.

The company still has a tonne of debt – around US$8.5 billion, but also has US$2.3 billion of cash on its balance sheet. I wouldn’t be surprised to see the miner continue to pay down its debts this year, following on from last year.

The good news is that Fortescue’s debt is not due for repayment before 2019, but the company can pre-pay – which it has been doing with other debt.

Foolish takeaway

If the iron ore price stays high or goes higher, Fortescue could see its share price even higher, but a number of analysts think the current rally is only temporary and commodity prices will come down sooner, rather than later.

If that happens, look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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