Iron ore miner Fortescue Metals Group Limited (ASX: FMG) has been forced to respond to a query from the market watchdog regarding the sharp rally experienced by the group's share price on Monday, 7 March 2016.
What happened?
Fortescue's share price surged as much as 26.3% during the session before ending the day 23.7% higher at $3.08. It followed a strong rise in the price of iron ore overnight, while others in the industry, including BC Iron Limited (ASX: BCI) and Arrium Ltd (ASX: ARI) also experienced incredible gains (their shares rose 52% and 33.3%, respectively).
What did raise some red flags however, was the fact that a market sensitive announcement was issued by Fortescue's management on Tuesday morning, leading some investors to question whether there was something untoward about Monday's rally.
In its response to the ASX's query, Fortescue confirmed its belief that Monday's trading activity was caused by the rising iron ore price as well as futures trading, with some of those investors holding short positions being forced to buy shares to cover their positions as the shares rose (notably, investors holding short positions are making a bet that a company's share price will fall, rather than rise).
Furthermore, it also said that it does not believe its second announcement, which disclosed the fact that the Memorandum of Understanding (MOU) with Vale could involve Vale acquiring a 5% to 15% in Fortescue's listed shares, would have a material effect on the price of its shares. This is due to the fact that the MOU referred to a potential investment by Vale in Fortescue, and that it would involve only a "minority interest".
To be clear, we saw it as unlikely that there was anything untoward about Monday's rally, or that anybody within the company had breached any insider trading laws. But it's certainly nice to know that the ASX was looking out for ordinary investors.
What happens now?
Fortescue, together with a number of other iron ore miners, has enjoyed an incredible rebound recently, in line with the rally experienced by iron ore itself (including an unprecedented 18.6% gain overnight on Monday). It's certainly been a welcome breath of fresh air for investors in the sector, who had watched their shares plummet in prior years.
Before investors get too excited however, there is the risk that the recent iron ore rally doesn't hold. It can be painful watching shares in the sector explode – as Fortescue's shares did on Monday – but staying on the sidelines seems like an appropriate strategy for those investors (myself included) who doubt the sustainability of the rally.
