Iron ore prices send Fortescue shares to a record high

Fortescue Metals Group Limited (ASX: FMG) share price hits record high today.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Fortescue Metals Group Limited (ASX: FMG) share price hit a record high of $10.37 this afternoon as news wires report the steel ingredient is commanding around US$93 per tonne today.

That compares to around US$70 per tonne at the start of 2019 with the near 25% rise over the year sending Australia's leading iron ore miners higher. 

Fortescue is now up more than 150% in 2019 as its valuation tends to exhibit the most beta towards iron ore prices due to the leverage on its balance sheet. In other words, if iron prices rise, stronger-than-expected investors will pile into Fortescue on the basis it's cheap versus the profits it has potential to print. Whereas if iron ore prices tumble, investors tend to jump ship out of concern its balance sheet is over-extended and a serious downturn in prices could place it under real pressure.

Other leading miners like Rio Tinto Limited (ASX: RIO) or BHP Group Ltd (ASX: BHP) are more diversified with less leveraged balance sheets. This means they tend to follow the iron ore price higher or lower, but not to the same extreme as Fortescue. 

In fairness, the strong iron ore prices and huge profits have helped Fortescue greatly deleverage over the past few financial years. 

As at the end of fiscal 2019, Fortescue's net debt to what it describes as 'underlying EBITDA' stood at just 0.3x, while gross debt to 'underlying EBITDA' stood at 0.7x. Back in fiscal 2015 gross debt to 'underlying EBITDA' stood at 3.8x.

Today gross gearing (debt/equity) stood at 27%. 

If iron ore pries hold up or climb higher over the medium term, Fortescue shares are probably still cheap. However, if they revert back to long-term averages the shares could come under selling pressure. 

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Broker Notes

These ASX 200 shares could rise 50% to 60%

Brokers believe these shares could deliver big returns for investors.

Read more »

A girl is handed an oversized ice cream cone with lots of different flavours.
Best Shares

8 ASX All Ords shares that tripled in value in FY25

Just 8 out of the 500 companies making up the ASX All Ords achieved share price growth of 200% or…

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Woman with a scared look has hands on her face.
Broker Notes

Bapcor shares fell more than 30% yesterday. Should investors buy in the dip?

Is this a value opportunity?

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Broker Notes

Broker raises price targets on 2 ASX 200 shares to buy

Ord Minnett has just upped its 12-month share price targets on 2 buy-rated ASX 200 stocks.

Read more »

Man with rocket wings which have flames coming out of them.
Share Gainers

Guess which ASX All Ords stock just rocketed 34% on strong earnings growth

Investors just sent this ASX All Ords stock surging 34%. Here’s what’s happening.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why DroneShield, Gentrack, Metals X, and Northern Star shares are tumbling today

These shares are ending the week in the red. But why?

Read more »

A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.
Share Gainers

Why Dimerix, Newmont, Regal Partners, and Titomic shares are storming higher

These shares are having a good finish to the week. Let's see why.

Read more »