Fortescue shares: 4 reasons to buy (and not buy) in 2023

The Australian iron ore producer has its pros and cons at the moment…

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.

Published January 18, 2023 11:34 am AEDT

The Fortescue Metals Group Limited (ASX: FMG) share price has been like a runaway train for the past six months. Yet, after clawing 30% higher during this time, shares in the iron ore producer are only 6.2% above where they were a year ago.

It's no secret that the Fortescue share price tracks closely with the price of the steelmaking commodity it produces. As such, the short-term performance of the company will likely be guided by iron ore supply and demand.

However, there are other factors that I believe are important in considering whether to buy or avoid Fortescue shares in 2023.

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Two reasons to buy

One of the most enticing aspects of Fortescue Metals Group is its low cost of production.

In September 2022, the company stated that its C1 costs (mining costs) came in at US$17.69 per wet metric tonne. That makes it a highly competitive producer against miners that are much larger such as BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).

What this means is Fortescue should be able to deliver profits even in an environment where iron ore prices are much lower than the current US$121 per tonne.

Secondly, an investment in Fortescue shares could be considered a hydrogen call option. What I mean by that is: if hydrogen is to become the clean, green energy source that it's cracked up to be in the future, Fortescue could greatly benefit from this.

Not only does it have a commercial interest in hydrogen through Fortescue Future Industries, but the company's operational costs could be drastically reduced. Currently, management is planning on eliminating fossil fuels from its operations by 2030.

Why not buy Fortescue shares?

Of course, a rose is not without its thorns… There are a couple of reasons why I'd be cautious about buying Fortescue shares this year.

Firstly, the ludicrous dividends from the Western Australia miner could take a hit in 2023. Analysts at Goldman Sachs think the passive stream will come under pressure due to the company's spending on decarbonisation.

Another worrying sign in my eyes is the extent of turnover in the management team recently. Less than two weeks ago, Fortescue's chief financial officer became the ninth senior executive to depart the company.

It might be coincidental… at minimum, it could create some pains in trying to manage the company until suitable replacements are found.

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