Fortescue Metals Group Limited releases quarterly update: Is it a buy?

It has been yet another solid quarter of production and shipments for iron ore giant Fortescue Metals Group Limited (ASX: FMG).

This morning the miner released its market update for the quarter ended September 30 2016 and once again went some distance to justifying the stunning 173% rise in its share price this year.

For the quarter Fortescue Metals reported shipments of 43.8 million tonnes of iron ore, which was up 5% year on year and consistent with its prior guidance.

Impressively cash production costs (C1) improved for the eleventh consecutive quarter. During the quarter C1 costs dropped to US$13.55 per wet metric tonne. This was a 5% drop on the previous quarter and a massive 20% lower than the prior corresponding period.

This reduction means the company is benefiting from increasingly strong cash margins. As a result it has been able to continue paying down debt. In the latest quarter the company repaid a further US$700 million of debt, reducing net debt to US$4.2 billion inclusive of US$1.8 billion cash and finance leases of US$500 million.

The good news is that management believes C1 costs can continue to fall. In FY 2017 it has forecast C1 costs of between US$12 and US$13 per wet metric tonne. This is based on an AUD/USD exchange rate of 0.75 and a WTI oil price averaging US$50 per barrel.

Shipment guidance has been maintained at 165 million to 170 million tonnes, broadly in line with FY 2016 shipments of 169.4 million tonnes.

If iron ore prices remain at their elevated levels then I would pick Fortescue Metals ahead of rivals BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) for an investment. Its operations have become incredibly efficient and its paying down of debt is something I applaud.

But I can’t help but feel that iron ore prices are going to head lower over the next 12 months due to an expected increase in supply from Australia and Brazil. Whilst Fortescue will still remain profitable at lower levels, it won’t enjoy the bumper profits it is producing now.

My fear is that this could lead investors to head for the exits and cause its share price to take a tumble. So for this reason I’m choosing not to invest today. However, if you’re bullish on iron ore then you could do a lot worse than an investment in this iron ore giant.

If you're not bullish on iron ore like me then I would suggest you take a look at these rapidly growing ASX shares instead. Each has been growing earnings at a rapid clip and I expect this could continue for some time to come.

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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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