Fortescue Metals Group Ltd (ASX: FMG) shares have dropped 5.5% from 19 April 2023, which means they're now at a cheaper price. As such, many investors may be wondering whether it's a good time to consider buying the ASX mining share.
As one of the world's biggest iron ore miners, the company can see fairly volatile movements in the share price as investors evaluate its profitability potential with the latest iron ore price.
Miners generate good profits when their resource price is more than the cost of mining it. If the iron ore price goes higher, that's largely extra profit because mining costs generally stay the same. If the iron ore price goes lower, the fall in revenue largely comes straight off net profit.
With that in mind, I'm going to run through some positives and negatives of buying Fortescue shares right now.
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Negatives
The iron ore price seems to be volatile and cyclical. If I were trying to make the best returns I could, I'd try to buy when the iron ore price is weak and when there's fear in the market about the iron ore and Fortescue share price outlooks. I'd suggest that's when the iron ore price is at least below US$100 per tonne.
With the iron ore price currently above US$110 per tonne, according to Commsec, it doesn't seem like we're at the weakest point in a cycle.
There's also concern about the potential fallout from the relatively new China Mineral Resources Group which aims to centralise buying of iron ore in China. The move to collective bargaining could mean the iron ore price is pushed lower than it otherwise could have been.
Some sceptical investors may also suggest that Fortescue's green energy plans with its Fortescue Future Industries (FFI) division may soak up a lot of capital. This could mean the company doesn't have as much cash to pay the large dividends the market is used to.
Positives about buying Fortescue shares
The iron ore price fell below US$100 a few weeks ago, so we may already have seen the low for the commodity — for now at least.
It's worth noting that activity in China may well push the iron ore price higher. Chinese regulators recently cut the interest rate and there is speculation more support for the property and construction sector may be on the way. The iron ore price has climbed to US$112 per tonne and could go even higher if China launches support. This, in turn, could boost the Fortescue share price and dividends.
I like the moves the business is making to boost its iron operations, including the opening of the higher-grade operations at Iron Bridge and the planned expansion into iron ore mining in Africa.
With the Fortescue share price lower, investors are now also getting cheaper exposure to the FFI side of the business which is aiming to make 15 million tonnes of green hydrogen per annum by 2030. The business has customers like German multinational electricity company E-ON already lining up to buy significant quantities of its production.
At the current iron ore price, Fortescue can still make pleasing profits and pay good dividends. At the latest Fortescue share price, it's projected to pay a grossed-up dividend yield of 8.8% in FY24, which is an appealing payout.
