Fortescue shares rocket as iron ore prices go beserk

Credit: Chatham House

Shares in the major iron ore miners like Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have been rocketing this week after iron ore prices surged on the prospect of renewed Chinese demand.

Yesterday Fortescue shares jumped some 20 per cent on the iron ore price strength and today the company announced that it proposes to enter a joint venture agreement with Brazilian iron ore mining giant Vale S.A.

The joint venture would allow the two companies to save on supply chain costs by blending selected volumes of iron ore from both companies once delivered to Chinese ports.

Moreover, the agreement also proposes the possibility of Vale S.A taking an equity ownership interest in the heavily indebted Fortescue, or potentially investing in Fortescue’s iron ore mines and assets.

Fortescue’s decision to seek investment from a Brazilian multinational may raise eyebrows after its own chairman Andrew Forrest spent much of 2015 complaining that multinational iron ore miners have a malign influence on Australian iron ore markets.

Mr. Forrest’s company was built on debt and still carries US$6.1 billion in net debt that means sustainable cost saving initiatives alongside investments from big multinational rivals are just the tonic for equity owners who have witnessed the company’s value collapse in half since early 2014.

Today’s iron ore price surge to around US$63 a tonne has been widely attributed to the Chinese state hinting at a renewed infrastructure investment drive as part of its latest economic growth plan that is likely to see increased demand for the key steel-making ingredient.

Investors would be wise to consider whether the iron ore price rises are sustainable before jumping into the iron ore stocks, as any reversal in the recent price rises is likely to see the iron ore miners come under selling pressure once again.

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

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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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