The Fortescue Metals Group Limited (ASX: FMG) share price has been one of the standouts on the market so far today.
At the time of writing the low cost iron ore producer's shares are up over 5% to $5.32.
Why have its shares stormed higher?
Overnight the iron ore price continued to defy the odds and extended its impressive rally.
According to Metal Bulletin, the spot price for the benchmark 62% fines rose 2.4% to US$69.48 a tonne.
This means the spot price has climbed in excess of 30% since the middle of June, despite concerns over increased supply and high levels of inventories.
Lower grade 58% fines also rose to US$47.18 a tonne during yesterday's trade.
It isn't just Fortescue rallying higher today on the news. Fellow miners Mount Gibson Iron Limited (ASX: MGX), Rio Tinto Limited (ASX: RIO), and BHP Billiton Limited (ASX: BHP) have all made notably strong gains today.
Should you invest in Fortescue?
With its costs on course to reduce to between US$12 and US$13 per wet metric tonne and the spot price for 58% at US$47.18 a (dry) tonne, Fortescue is working on a margin of approximately US$30 to US$31 a tonne when accounting for differences between wet and dry tonnes.
This certainly puts Fortescue in a position to generate high levels of free cash flow and pay a solid dividend to its shareholders.
The big question though is how long iron ore prices can remain at these levels. Unfortunately there is no way to know this so investors will have to weigh up the risks.
If you are confident that demand from China will result in iron ore prices remaining at current levels for the next 12 months and have a high tolerance for risk, then Fortescue could be a great investment idea.
But if you're not confident on the future direction of iron ore prices or have a low tolerance for risk, I would suggest you focus elsewhere in the market.
