Iron ore prices send Fortescue shares to a record high

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

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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.

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