Here’s why the Fortescue share price is rising today

The Fortescue Metals Group Limited (ASX: FMG) share price has gained more than 3% to $3.25 in early trading today, despite the iron ore price sinking 5% overnight.

Iron ore fell 5% to US$62.78 a tonne in what might be the tip of an iceberg. The recent rally from under US$40 a tonne in mid-January to over US$70 has been called unsustainable by a number of market commentators, company executives, China Steel industry representatives and resources analysts.

Adding another cause for iron ore prices to sink further are reports by Reuters that Chinese officials from the country’s top steelmaking province Hebei have told mill operators previously ordered to shut down that they were not allowed to restart production ‘under any circumstances’.

Soaring steel prices may have encouraged some mills to consider reopening, but provincial authorities are expected to step up monitoring, punish closed mills that reopen and investigate and sack local officials who allow the reopening of mills and approve illegal projects, according to the official Xinhua News Agency.

But back to Fortescue.

Thanks to an incredible effort to slash production costs, Fortescue is now closing in rapidly on the ultra-low costs producers (if it hasn’t already overtaken them) Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) and the miner believes that it has overtaken Brazilian giant Vale. Cash costs have fallen from SU$48 a tonne in 2012, to US$15 a tonne currently and expected to be US$13 a tonne by the end of June 2016.

The miner’s breakeven price is expected to be as low as US$28.80 a tonne.

That has allowed the world’s fourth-largest iron ore producer to generate huge cash flows and pay down its monster debt pile.

Fortescue announced today that it is voluntarily offering to repay US$577 million of Senior Unsecured Notes due in 2019 from cash on hand. As the company’s chief financial officer Stephen Pearce said, “Today’s announcement brings the amount of debt Fortescue has repurchased in the last 12 months to US$1.7 billion, with our total debt repayments in the last two and a half years now exceeding US$4.8 billion.

At the end of March 2016, Fortescue had net debt of US$5.9 billion, with US$4,839 million in a credit facility due in 2019 and the US$577 million in notes that it expects to repay. At one stage in 2013, Fortescue had  US$12.6 billion of debt but has managed to repay a large chunk of it.

Foolish takeaway

Paying down debt makes Fortescue less risky and saves the company in interest expense – hence today’s rising share price, and the miner is likely to continue paying down its debt. No wonder the share price has more than doubled since January.

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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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