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Here’s why Fortescue Metals Group Limited shares are soaring today

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The shares of Fortescue Metals Group Limited (ASX: FMG) are an early riser today following an announcement out of the iron ore miner stating that it has issued a US$700 million repayment notice for its 2019 term loan.

According to the release the term loan repayment will be made at par on Friday 16 September 2016 and will generate annual interest savings of approximately US$26 million. The market is evidently very pleased with the move judging by the 4% jump in its share price in morning trade.

Fortescue Metals’ chief financial officer Stephen Pearce had this to say on the repayment:

“This US$700 million repayment adds to the US$2.9 billion which we repaid in FY16 and further reduces our all-in cost base. We will continue to apply our free cash flow to repay debt, lowering our gearing and strengthening our balance sheet.”

I have been impressed with the way the company has managed to reduce its debt in the last 12 months. At one stage Fortescue had over US$6 billion due in 2019, but this has gradually been cut down to a manageable $2.9 billion today.

But is Fortescue Metals a good investment?

That would depend entirely on where you believe the iron ore price is heading. I believe Fortescue Metals is being run exceptionally well and would be a fantastic investment if the iron ore price increases or at least stabilises.

But if the iron ore price were to fall drastically then its shares and those of BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) could come under heavy selling pressure.

Because of the unpredictable nature of commodity prices I would personally suggest investors focus on other areas of the market.

Instead of Fortescue Metals or BHP these three new style blue chip shares could be better options for investors. Each has growing earnings and dividends and the potential to bolt higher in the coming months in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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