Are Fortescue shares a buy or a sell in September?

Is the miner an opportunity worth digging into?

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Fortescue Metals Group Ltd (ASX: FMG) shares have seen plenty of volatility in the last few months.

Since 26 July 2023, the Fortescue share price has fallen by around 18%, as we can see on the chart below, though some of that may be explained by the business going ex-dividend for its $1 per share FY23 final dividend.

The ASX iron ore share is facing uncertainty on many fronts. These include ongoing concerns over Chinese demand for iron ore, executive changes within the company, and doubts about the success of its green energy endeavours.

Fortescue has already said its recent management changes won't affect the business, claiming its rapid succession of departing executives weren't the right fit for the company

a female miner looks straight ahead at the camera wearing a hard hat, protective goggles and a high visibility vest standing in from of a mine site and looking seriously with direct eye contact.

Image source: Getty Images

Iron ore uncertainty

As with all resources businesses, the price of the commodity is key to how much profit the company is able to make. When prices go up, it's extra revenue for the same amount of production. Typically, costs don't change month to month with the extra revenue leading to a big rise in profitability.

But it also applies in the reverse. When the iron ore price goes down, profit can be quickly wiped off.

The iron ore price is heavily influenced by demand from China. There has been plenty of commentary that the Asian superpower's economy has not recovered from the impacts of COVID-19 yet.

The iron ore price is currently sitting at above US$110 per tonne, a very good price for Fortescue to be making good cash flow. Indeed, the current price is probably higher than some analysts were expecting.

If it were stay to above US$110 for the rest of FY24, I'd say the Fortescue share price is good value at under $20 and it could mean the FY24 dividend could be stronger than expected.

In FY23, it achieved average revenue per dry metric tonne (dmt) of US$94.74 (remembering that most of its production is lower-grade ore and sold at a discount to the standard iron ore price).

Estimates on Commsec suggest the business could pay an annual dividend per share of $1.11, which would be a grossed-up dividend yield of 8.2%. If it were to repeat the FY23 annual dividend per share of A$1.75 in FY24, it would represent a grossed-up dividend yield of 12.9%.

High hopes for green energy

Fortescue is looking to bring online a number of projects involved in producing green hydrogen and green ammonia. It's working towards a final investment decision (FID) on priority projects in Australia, the US, Norway, Brazil, and Kenya.

The Australian Financial Review reported the CEO of Fortescue's energy division, Mark Hutchinson, said the business is "trying to reset the market's view of the company". It's aiming to increase Fortescue's price/earnings (P/E) ratio from between five times to 10 times to between 15 times to 20 times.

We also learned more about how its energy projects will be funded differently. If a project were to cost $100, it would be funded with $60 of non-recourse debt and $40 of equity, with between 50% to 75% of the equity funded by sovereign wealth funds. That would lift the rate of the return "towards the mid-teens", according to Hutchinson.

Progress continues and this side of the business is promising for both earnings and what it could do for the valuation of Fortescue.

Is the Fortescue share price a buy?

This seems like it could be an opportunistic time to invest though in the short-term, the success of the business could be dictated by the direction of the iron ore price. If the commodity doesn't fall from here then good profits and dividends in FY24 could be on the way. For me, times of weakness are usually the best time to buy, so an even better price could appear later this year.

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. 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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