3 reasons why the Fortescue Metals share price is soaring today

Credit: iStock

Fortescue Metals Group Limited (ASX: FMG) has seen its share price jump 6% to $3.52, a price not seen (before today that is) since late 2014.

It’s a remarkable comeback considering the world’s fourth-largest iron ore miner had seen its share plunge as low as $1.44 on January 27, 2016. More gains could be ahead too, especially if the iron ore price continues its recent trend.

Here are three reasons why the shares are soaring today…

  1. A higher iron ore price. As we wrote earlier today, the spot iron ore price surged 4.1% overnight to US$62.85 a tonne on the back of higher steel prices. A recovering Chinese property sector and increasing steel production appears to be driving iron ore prices higher.The iron ore price had hit a 10-year low late last year of US$38.30 a tonne but is now up 64% since December 11. Fortescue’s share price is up nearly 97% since then.
  2. Short sellers, who have bet on the miner’s share price sinking, are being forced to cover their short positions by buying shares. As of last week, 4.5% of Fortescue’s shares outstanding were shorted, and while that doesn’t make it into the Top 10 shorted companies, there were still short bets on 139 million shares as of last week. There’s also a bit of a virtuous circle that occurs, with more shorters forced to cover their positions as the price rises, sucking in even more shorters.
  3. Production is rising and costs continue to fall. Announcing its March 2016 quarterly report, the miner says it could potentially beat full year production guidance, with shipments ahead of target.Fortescue has also done a truly remarkable job in cutting its production costs to the stage where it is getting close to if not equal to the lowest cost producers in the world, Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP). Fortescue recently reported C1 cash costs of US$14.79 per wet metric tonne, down 43% over last year. It was also the ninth consecutive quarterly reduction.

Foolish takeaway

As long as the iron ore price remains around levels above US$60 a tonne, it would be tough to bet against Fortescue over the long term. But that’s the main issue. Many analysts and even Rio’s CEO don’t expect iron ore prices to remain high through to the end of 2016 – and that’s bad news for Fortescue and its shareholders.

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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

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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