Fortescue Ltd (ASX: FMG) 's share price has had a strange and difficult year. The iron ore miner's shares are down more than 33% this year but have climbed 10% in the last month.
After such a volatile period, it's worth asking whether the company is a buy today or not.
I think it can be a good idea to consider ASX mining shares when they're at the low point of their commodity cycle. Over the last five years, Fortescue's low point has typically been when the iron ore price went below US$100 per tonne.
The iron ore price is trading close to US$100 per tonne, so let's consider if the business is an opportunity.
Positive reasons to buy Fortescue shares
The market sent the Fortescue share price higher last week based on expectations that China would announce the launch of another financial stimulus to boost the economy.
Trading Economics noted that at the country's annual economic planning conference, led by President Xi Jinping, China outlined plans for proactive fiscal policy and moderately looser monetary policy. This includes increasing the deficit, issuing more ultra-long bonds next year and lowering interest rates.
Any form of financial stimulus that stimulates economic activity in China could boost iron ore demand and the iron ore price. However, China may wait until the size (and pain) of the tariffs initiated by incoming US president Donald Trump is known.
It's possible that China may launch a blockbuster package that could deliver significant support for commodities such as iron ore.
With the iron ore price currently around US$105 per tonne, I think Fortescue is still capable of producing a sizeable profit and paying decent dividends, even as it invests significant sums into green energy production and decarbonisation.
Broker UBS suggests the Chinese stimulus "offers some downside protection and has stabilised risk-reward". UBS forecasts the iron ore price will be around US$100 per tonne in 2025.
Negatives of investing today
As I noted earlier, the Fortescue share price has already rallied over the past month, making it appear less attractive than earlier.
UBS is predicting Fortescue could pay a dividend pay share of 86 cents in FY25, which would translate into a fully franked dividend yield of 4.4% and a grossed-up dividend yield of 6.3%, including franking credits. That's not a lot of dividend income compared to the dividend yield Fortescue shares have offered over the last few years.
The price/earnings (P/E) ratio seems quite elevated for what could happen with the company's profit. According to UBS' projections, the Fortescue share price is valued at 16x FY25's estimated earnings.
UBS suggests the iron ore price could be US$95 per tonne in 2026 and US$90 per tonne in 2027, which implies Fortescue's profit could become increasingly challenged in the next couple of years.
From my perspective, the market excitement for green energy appears to have declined, which is disappointing considering the effort and money Fortescue has invested in producing green hydrogen and green ammonia.
I don't think the Fortescue share price offers enough margin of safety, given the uncertainty surrounding Chinese demand. An increase in iron ore supply could also be a headwind for the iron ore price in the coming years, particularly if African iron ore supply grows over the rest of the 2020s.
