The Fortescue Metals Group Ltd. (ASX: FMG) share price hit a new all-time high of $8.23 yesterday. The Fortescue share price has pulled back slightly since then and is now trading at $8.08 at the time of writing.
This caps off a phenomenal six months for Fortescue shares. Only in September last year, Fortescue was trading around the $3.50 mark. Had you bought shares at that time, you would be sitting on a 135% gain (not including dividends) in just 7 months if you had sold out yesterday. Normally, parabolic swings like this are seen in penny stocks and the like, so this is a phenomenal rise for a blue-chip share like Fortescue.
Fortescue Metals Group is an iron ore company founded in 2003 and worth $25 billion today. The company primarily operates in the Pilbara region of Western Australia and is the third-largest iron ore producer in Australia – behind ASX giants Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP).
Unlike BHP and Rio Tinto though, Fortescue derives most of its revenue (over 98%) from iron ore production, making the company a pure iron ore stock. Although iron ore is a highly demanded commodity, it is also a highly volatile one, with prices experiencing rapid and violent swings. For example, the iron ore spot-price was under $65 in December last year, whereas today, the spot price is trading near a five-year high of $95 (a 50% increase in six months).
While this volatility would be a huge problem for a smaller miner, Fortescue has reduced its cost of extracting one tonne of iron ore from US$33.84 in 2013/14 to just US$12.36 in 2017/18, which makes it almost immune to volatility. It also means that upswings in the price are very lucrative for the company, as any rise in the price above the cost of production increases profit exponentially.
Foolish Takeaway
In conclusion, the stars have aligned for Fortescue's share price. Last time iron ore prices were at these levels, the Australian dollar was trading at around 87 US cents, compared to today's 71 cents, making exports like iron cheaper for international customers such as China. Together with the 65% reduction in mining costs for the company since 2014 – Fortescue has never been more profitable. Therefore, it makes perfect sense that the company's shares are reaching these all-time highs.
