Can the Fortescue share price hold up if the iron ore price falls?

Company chairman Andrew Forrest isn’t worried about iron ore prices or Fortescue’s future.

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Key points

  • Some market experts think times are looking tougher for the Fortescue share price
  • But company chairman Andrew Forrest doesn’t think there’s going to be a global recession
  • The low-cost nature of Fortescue’s operations and green energy projects could help see it through, he says

The Fortescue Metals Group Limited (ASX: FMG) share price is under the microscope amid market uncertainty about the iron ore price.

Fortescue is a major iron ore ASX mining share. As such, the movement of the iron ore price has a significant impact on the company’s profitability.

But the founder of Fortescue, and one of the country’s prominent business leaders, Andrew Forrest is not worried about what might happen next.

Forrest optimism

According to reporting by the Australian Financial Review, Forrest said there is “not a snowflake’s chance in hell” of a global recession this year. While individual countries could see a recession, he thinks that pent-up demand after COVID will help things.

But Forrest conceded markets might be “choppy and uncertain” for up to three years, the report said.

Forrest pointed to a couple of areas that will enable Fortescue to get through the current problems of rising interest rates, elevated inflation, and slower growth. Those advantages are Fortescue’s low-cost base and its green energy plans.

Another factor that could impact the iron ore price — and the Fortescue share price — is the potential of a ‘central ore buyer’ in China to try to control the iron ore price, according to the Australian Financial Review.

Forrest’s response? He said it was “a story which gets trotted out every three years”. So, we’ll see how that one plays out.

Green energy ambitions to offset inflation?

Forrest thinks that Fortescue will be able to weather inflation and higher interest rates. He believes the company can still raise capital and get through a period of lower commodity prices. Forrest said:

Demand for our product has remained strong. And if global demand for iron ore goes down, the last man standing will be the lowest cost producer. And that is Fortescue.

Fortescue is looking to build a global portfolio of projects to enable it to produce millions of tonnes of green hydrogen (which is made using renewable energy). Forrest said:

We smoke $3.5 billion worth of fossil fuel into the atmosphere every year. That is one hell of a pool of capital annually to invest into your own fuel production and green iron systems.

The AFR noted that there is lots of capital looking for investible projects, with Forrest saying a large part of that is looking for green projects.

Is the Fortescue share price an opportunity?

Forrest might answer yes to that question.

But some brokers recently gave a different view. Morgan Stanley currently rates it as ‘underweight’, which is like a ‘sell’. The price target is $15.95, suggesting a decline of around 10%. However, a recent change in Indian tariffs could provide a boost for lower iron ore grade miners, such as Fortescue.

The broker Ord Minnett rates it as a ‘hold’, with a price target of $19. That suggests a potential rise of around 7.5%.

Looking at the projected grossed-up dividend yield, Ord Minnett thinks it could be 16.7% in FY22 and 14.4% in FY23.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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