An increase in the iron ore price during the September quarter hasn’t stopped the Fortescue Metals Group Limited (ASX: FMG) share price from plunging back towards it two-year low of $3.53 that it hit last month.
The miner reported a pleasing 12.5% increase in the price of its lower-grade iron ore to US$45 a tonne, which is well ahead of the 3.7% increase in the benchmark iron ore price in the three months to end September.
But investors aren’t in a buying sort of mood with the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index crashing into correction territory, which is defined by a fall of 10% or more from its most recent peak.
The underperformance of Fortescue is understandable as it is the poorer cousin to the two big boys of the sector, but I am starting to think that shares in Fortescue are beginning to look interesting in light of the latest quarterly production report.
The discount between its lower grade ore and the benchmark with 62% iron content has been a key reason why I have avoided the stock even though I am overweight on the mining sector.
The discount has blown out well beyond the longer-term average but this gap appears to be finally closing.
What’s more, the next market rally (which I believe is only a few weeks away) will favour underperformers like Fortescue, and there are few underachievers quite like this miner.
Shares in Fortescue have collapsed 28% over the past year when BHP Billiton and Rio Tinto share prices are up 15% and 7%, respectively.
Don’t worry about the market correction – Fortescue has been in a bear market for a long time! A bear market is defined as a fall of 20% or greater.
Sure, the underdog doesn’t quite have the balance sheet strength of BHP or Rio Tinto but Fortescue is trading at a more than 25% discount to its bigger rivals on an FY19 consensus price-earnings (P/E) basis.
There’s also little good news priced into Fortescue’s share price in my opinion and if the price of its ore can continue to play catch-up, the stock is likely to re-rate over the coming months.
On the downside, costs inflation is starting to bite with the C1 cost for the quarter coming in at US$13.19 per wet metric tonne (wmt). Higher crude prices are a contributing factor while the waning Aussie dollar helped offset some of this pressure.
It’s worth noting that Fortescue is sticking to its FY19 C1 cost estimate of US$12 to US$13 wmt and its production guidance of 165 million and 173 million tonnes of ore.
Every dog has its day and Fortescue’s might be around the bend.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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 Scott Phillips.