The Fortescue Metals Group Limited (ASX: FMG) share price has risen by 40% over the past three months. What has been driving the ASX miner higher?
Fortescue is one of the biggest miners in Australia and it has rapidly recovered a lot of its lost market capitalisation. The Fortescue share price fell to around $14 in October.
Image source: Getty Images
The iron ore price is recovering
Fortescue is a substantial iron ore miner, one of the biggest in the world along with BHP Group Ltd (ASX: BHP), Vale and Rio Tinto Limited (ASX: RIO).
Miners have to accept the best price that they can get for the commodity that they produce. Resource prices can be volatile and cyclical.
The iron ore price was exceptionally high in the middle of 2021 thanks to Chinese demand. However, as Fortescue reached the final quarter of the 2021 calendar year, the iron ore price fell with China telling steel producers to reduce their output and improve their emissions profile as the Winter Olympics got closer.
Whilst the iron ore price fell to around US$80 per tonne in November, it has since come roaring back to around US$140 per tonne.
What does this mean for the Fortescue profit?
Profit expectations can have a sizeable impact on the Fortescue share price.
For Fortescue, extracting the iron ore from the ground largely costs the same whether the iron ore price is US$100 or US$150 per tonne. So, a higher iron ore price largely adds to the net profit apart from paying more money to the government as well.
Brokers had been expecting that the iron ore price would drop to around US$90 or US$80 per tonne this year. The consensus view was not that iron ore would see a recovery back above US$130 per tonne as we have seen.
What do analysts think of Fortescue now?
The broker Macquarie thinks that the Fortescue share price is a buy, with a price target of $21.
It was noted by Macquarie that Fortescue's iron production in the second quarter of FY22 was good, but the discount paid for the ASX miner's iron ore is increasing because it's a lower grade than what is supplied by peers like BHP and Rio Tinto.
In the second quarter, Fortescue's iron ore shipments of 47.5 million tonnes contributed to shipments of 93.1mt for the first half of the year, which was 3% higher than the first half of FY21.
However, there are plenty of brokers that don't think the Fortescue share price is going to perform this year. UBS rates it as a sell with a price target of just US$14.90.
Credit Suisse has an even lower price rating of just $13.50, suggesting that it looks expensive compared to its peers. But it does see the potential for the green division of the company called Fortescue Future Industries (FFI).
The ASX miner recently announced the acquisition of UK-based Williams Advanced Engineering (WAE) for approximately US$223 million. It provides critical technology and expertise in high-performance battery systems and electrification.
