Most investors are bearish on the resources sector right now and for good reason. Commodity prices are crashing with conditions expected to continue declining over the coming months, and even years, as China's economic growth rates subside.
Indeed, investors have taken a particularly cautious approach to the high-cost miners, as well as those with huge piles of debt which both pose as key risks in a low-price environment. Australia's third biggest iron ore miner, Fortescue Metals Group Limited (ASX: FMG), is one such company with plenty of critics.
The shares have crashed 56% over the last 12 months, and 71% over the last 18 months, to trade at just $1.80. However, Morgan Stanley analysts believe that now could be a good time to buy the miner.
The financial services giant upgraded the stock to "overweight" yesterday and increased its 12-month price target by 10% to $2.70 (50% above today's price tag). As highlighted by the Fairfax press, Morgan Stanley believes that the low Australian dollar should help to offset the plummeting iron ore price while the miner should also be able to meet all its debt obligations as they stand today.
Meanwhile, the group believes Fortescue can continue to cut costs as it refocuses on operating efficiencies rather than growth.
Should you buy?
Although Fortescue's shares are trading near their lowest prices in more than six years, investors need to recognise the strong headwinds facing the industry which could seriously hinder the company's future prospects. Indeed, the iron ore price is currently hovering around US$56 a tonne but some analysts expect that to plunge below US$40 a tonne in the near future.
At that price, it's possible that Fortescue would struggle to repay its debt, while even low-cost producers such as BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) would be operating on wafer-thin margins.
While the prospect of a 50% gain might seem enticing, I believe investors would be better served investing their money elsewhere. After all, investors could also lose up to 100% of their investment if things go pear shaped.
