The Fortescue Metals Group Limited (ASX: FMG) share price hit another new all-time high today. Fortescue’s shares had been trending higher for most of the year, despite a brief (but sharp) dip in March, along with the rest of the broader S&P/ASX 200 Index (ASX: XJO). But since falling to a low of $8.58 on 9 March, the Fortescue share price has rallied over 62% to today’s new high of $13.95 before edging slightly lower to $13.93 at the close.
Real winners have been hard to find on the ASX 200 in recent months (especially in the dividend space), so is it too late to invest in Fortescue?
Why Fortescue shares are hitting the roof
Fortescue is an iron ore miner and one of the biggest in Australia at that. The company has a market capitalisation of over $40 billion (based on today’s closing share price). Unlike most other mining giants such as BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), Fortescue is a pure-play on iron ore, with the red dirt comprising almost all of the company’s earnings.
And it’s this red dirt that is sending the Fortescue share price higher today. Iron ore prices have been holding up remarkably well since the coronavirus pandemic set in. They haven’t dipped below US$80 per tonne in 2020 so far. But this week, iron ore prices have pushed over US$90 per tonne amid global supply concerns.
According to the Australian Financial Review (AFR), the Brazilian mining sector is currently being severely affected by COVID-19, and supply cuts are very likely in 2020. Brazil is one of the largest exporters of iron ore, so this supply squeeze is causing global iron ore prices to rise, and the Fortescue share price to follow suit.
Is the Fortescue share price a buy at these levels?
On one level, there is a lot to like about the Fortescue share price today. Fortescue is an extremely low-cost producer of iron ore and has an average cost of extraction of around US$13 per tonne. With iron ore prices currently sitting around US$92 per tonne, Fortescue has basically got itself a license to print money. This money will no doubt fund massive dividend payments for Fortescue’s shareholders if the iron ore price stays anywhere close to its current level – which in itself is a scarce commodity these days.
But by investing in Fortescue (as with all ASX resources shares) you are always taking on pricing risk. Fortescue has no control over the pricing of the commodity it mines, which leaves it at the mercy of the market. Iron ore is a notoriously volatile commodity as well, having touched both US$187 a tonne and US$40 a tonne in the last decade.
I think Fortescue is a great company, and one well worth adding to a diversified ASX portfolio. Its costs are so low that I don’t think it will ever be in serious risk of bankruptcy, even in a sustained iron ore bear market. Saying that, anything can happen with commodity prices (just take a look at oil recently). As such, I would probably wait until this company isn’t trading at all-time highs before adding it to my buy list.
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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.