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Why has the Fortescue share price dropped 20% in 6 months?

A rough six months has left this iron ore giant licking its wounds.

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Mitchell Lawler
Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.
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Key points
  • Fortescue shares are 22.5% worse off than where they sat six months ago
  • Waning demand has led to a fall in the price of iron ore
  • Investors might also be concerned about increased capital expenditure

The past six months have been a frustrating ordeal for the Fortescue Metals Group Limited (ASX: FMG) share price.

In the world of investing, there are few things more deflating than watching the share price of a stock you own drop precipitously. For investors of the iron ore giant, that is exactly what has played out.

Fortescue's share price has dropped a whopping 22.5% over a six-month timeframe.

So, what's behind this sharp decline? Let's take a closer look.

Woman disappointed at share price performance with her hands on her face.

Image source: Getty Images

Why the big tumble?

The fall in the Fortescue share price can be attributed to a number of factors. Although, one specific variable could carry the bulk of the blame.

Firstly, demand for iron ore — Fortescue's primary product — has been softening in recent months due to slowing economic growth in China, which is the biggest buyer of Australian iron ore.

Six months ago, the steelmaking commodity was going for US$154.40 per tonne. Whereas, this figure is tracking close to its 52-week low of US$92 per tonne — now perched at US$94.86. This undoubtedly would put pressure on Fortescue's margins, which would in turn weigh on the company's bottom line.

Secondly, Fortescue has up the ante in terms of its decarbonisation commitments in recent months. In September, the company announced its plan to pour US$6.2 billion into eliminating fossil fuel risk by 2030.

While Fortescue's management believes this could result in operating savings of US$818 million per annum, investors may not be so sure. Furthermore, there are concerns that this investment might mean taking a bite out of its future dividends.

Could the current Fortescue share price be a buy?

While it's never fun to watch the value of our investments decline, it's important to remember that share prices are just one metric by which to judge a company. What really matters is where Fortecue's earnings could be in the future.

Unfortunately, analysts at Goldman Sachs think those future earnings could be impacted in the near term. As a result, the team believes dividends could be squashed to 38 US cents by FY24, with more downside in the ensuing years.

Right now, Goldman has a $13.40 target on the Fortescue share price. This would suggest a further 20% downside to the company's valuation from here.

Shares in Fortescue are down 3.3% today. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is wearing a 1.1% markdown.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. 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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