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Why the Fortescue Metals share price fell 24% in July

The Fortescue Metals Group Limited (ASX: FMG) share price has fallen from grace in a rather dramatic fashion over the month of July, dropping from the $9.55 level it touched in early July to the $7.26 price we have seen this morning – a fall of 24% in just over a month. This is a fairly heavy fall for one of the ASX’s biggest mining blue-chips, especially in a month that saw the ASX breach its all-time highs. So what’s behind this fall? And (more importantly) is Fortescue a buy today?

A Fortescue refresher

Fortescue Metals is one of the biggest iron miners on the ASX (and the world) but was only founded in 2003 by Andrew ‘Twiggy’ Forrest. The company is focused almost entirely in the red hills of the Pilbara region of Western Australia.

Unlike its large-cap contemporaries BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO), Fortescue derives almost the entirety of its earnings from just iron ore, making it a pure iron play. Thus, the company’s fortunes tend to ride solely on the price of iron ore and so you don’t have to look too far to explain its share price movements.

What’s behind the drop?

The iron market was turned on its head in January this year when a mining dam belonging to Brazilian miner Vale collapsed. This tragedy resulted in Vale’s iron production being halted and caused a supply squeeze in the global market – pushing the price of iron ore from US $70 per tonne in January to over US $120 per tonne by July. Fortescue shares quickly followed suit, rising from $4.15 in January to the $9.55 July high.

But the good times didn’t last long, with iron ore prices now back around the US$100 mark and trending down. This is the primary cause of the FMG share price drop over the last month.

Foolish Takeaway

With resource shares (particularly pure plays like Fortescue) I think the best strategy is to wait until commodity prices are at historically low levels before you pounce. Although FMG shares have dropped substantially, I would be a lot more interested if they returned to the sub-$4 levels we saw last year. For me personally, Fortescue is a solid ‘keep waiting’.

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Motley Fool contributor Sebastian Bowen has no position in any of the 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 Scott Phillips.

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