An important lesson from today's Fortescue (ASX:FMG) share price

The Fortescue (ASX: FMG) share price has had a shocker today, falling more than 4%. Here's why you should pay attention.

| More on:

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

Fortescue Metals Group Limited (ASX: FMG) shares did not have a pleasant day today. At the close of trading, the Fortescue share price has fallen 4.25% to $19.16 a share.

It was worse earlier in the day though. At around midday, Fortescue shares were down more than 5.5% when a low of $18.87 a share was hit.

Today's move represents the latest chapter in what has been a rapid wind change for Fortescue. It was less than a month ago that this company was commanding a share price of $25.24 a share, meaning Fortescue has dropped 24% since 25 February.

As my Fool colleague reported this morning, it is concern over a falling iron ore price that seems to be weighing Fortescue down.

But let's look at the bigger picture for a moment. The miner's performance over the past few years has in some ways masked the dangers that are inherent with investing in a company like Fortescue.

Yes, the company is up an extraordinary 347% since the start of 2019. But investors would probably do well to remember that Fortescue shares also lost roughly 30% of their value over the preceding 9 or so years.

Iron is a fickle master, even for Fortescue

Headed by one of Australia's most successful business operators in Andrew Forrest, Fortescue is evidently an extremely well-run company. However, it is also bound to the fact that is a resource extractor at the end of the day.

Fortescue's fortunes are forever entwined with the price of iron ore. It's this fact that can make it a potentially dangerous company to invest in if you are unaware of these pitfalls.

Companies outside the resource sector are in far more control of their own destiny. Most companies can decide what prices to charge for their products or can differentiate what they sell in other ways. This is not the case with a miner like Fortescue.

Fortescue share price ups and downs

It can only sell its product, which is essentially the same as what every other iron or miner on the planet produces, for the prevailing market price. This is great in times when iron ore is rising. But it can be terrible (and capital destructive) if iron falls into a bear market.

For anyone who bought Fortescue shares at their mid-2008 peak had to wait until January last year for their investment to return to the share price they bought at. That's not a desirable scenario to find oneself in. But that's often the risk that is there when investing in a miner.

So make sure you keep all of that in mind if you're thinking about investing in iron ore mining shares. Not knowing the ins and outs of a miner, in particular, can be very dangerous indeed.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Resources Shares

Image from either construction, mining or the oil industry of a friendly worker.
Resources Shares

Why did the Mineral Resources share price rip 15% higher today?

The iron ore and lithium giant was the fastest riser of the ASX 200 on Thursday.

Read more »

A man wearing a hard hat and high visibility vest looks out over a vast plain where heavy mining equipment can be seen in the background.
Resources Shares

2030 forecast: As Australia's iron ore export earnings decline, copper will rise. What does this mean for BHP shares?

BHP is expanding its iron ore and copper production.

Read more »

An engineer takes a break on a staircase and looks out over a huge open pit coal mine as the sun rises in the background.
Resources Shares

4 reasons to buy BHP shares today

A leading expert outlines four key reasons BHP shares are a buy.

Read more »

Businessman walks through exit door signalling resignation
Resources Shares

Pilbara Minerals share price drops as CFO announces resignation

It’s been a challenging few years for outgoing Pilbara Minerals CFO Luke Bortoli.

Read more »

Miner looking at a tablet.
Resources Shares

What happened with the BHP share price in May?

Did you buy BHP shares in May? Here’s how much the ASX 200 miner returned.

Read more »

Two men in hard hats and high visibility jackets look together at a laptop screen at a mine site.
Resources Shares

Should I buy Fortescue shares today?

A leading investing expert offers his verdict on the outlook for Fortescue shares.

Read more »

A female miner wearing a high vis vest and hard hard smiles and holds a clipboard while inspecting a mine site with a colleague.
Resources Shares

Is this a good time to buy BHP shares?

Should investors jump on the ASX mining shares right now?

Read more »

a miner holds his thumb up as he holds a device in his other hand.
Broker Notes

Why Macquarie expects this ASX 200 copper stock to surge 36% in a year

Macquarie forecasts some hefty gains ahead for the ASX 200 copper miner. But why?

Read more »