The Fortescue Metals Group Limited (ASX: FMG) share price has been drifting lower in recent weeks.
Since 11 February 2022, Fortescue shares have dropped by 14%.
The iron ore price has seen a decline as well. According to Commsec the iron ore price has fallen to US$133.5 per tonne. It wasn't long ago that it was above US$150 per tonne.
What's the cause? Market commentators might suggest it's because of Chinese influence. The Australian Financial Review reported that "China's state planner and the market regulator told some iron ore traders to release excess inventory and reduce stocks to reasonable levels following a joint investigation in Qingdao, one of the country's largest iron ore ports."
China is the key buyer of iron ore, so what the Chinese do can have a significant impact on demand and prices. This can also have a flow-on effect on the Fortescue share price.
Fortescue also recently reported its FY22 half-year result for the six months to 31 December 2021.
Image source: Getty Images
HY22 result
Fortescue revealed that its revenue fell by 13% to $8.13 billion and net profit after tax (NPAT) dropped 32% to $2.78 billion.
The decline in profit led to a 41% reduction of the dividend to $0.86 per share. There was also a reduction of the Fortescue dividend payout ratio to 70% from 80%.
Another element of the profitability reduction was that the discount paid for Fortescue's lower grade iron ore is increasing. In the half-year period it was a 70% realisation of the average Platts 62% CFR Index, down from 90% in the prior corresponding period.
Indeed, brokers like Credit Suisse have made reference to the fact that they expect the discount to widen which will be detrimental for Fortescue's iron and hurt profitability.
Fortescue's higher grade solution
The ASX miner has been looking at some other projects that could increase the grade of iron ore produced. This could support the profit and the Fortescue share price.
The broker UBS says that completing the Iron Bridge project is important. It's expected to deliver its first production in December 2022. It will deliver 22mt per annum of high-grade 67% Fe magnetite concentrate product.
Fortescue also said that the innovative process design, including the use of a dry crushing and grinding circuit, will deliver globally competitive capital intensity and operating costs.
Regarding concerns about WA's closed borders limiting access to specialist skills required, the state's long-term border will come down in early March 2022.
It has entered into an agreement with the Government of the Republic of Gabon to develop the Belinga Iron Ore Project in the country, which is in West Africa. It's a 36-month exclusivity period. There will initially be exploration works to determine the potential size and grade of the deposit, as well as logistics solutions.
The Gabon Minister for petroleum, gas, hydrocarbons and mines said that the Belinga deposit is one of the world's largest high-grade iron deposits.
Fortescue has also signed a binding memorandum of understanding to complete an assessment of Sinosteel's Midwest Magnetite Project, with the assessment to include a rail and port development at Oakajee.
Fortescue share price snapshot
Whilst the company has seen a drop since mid-February, it is still up 40% since the end of October 2021 with the iron ore price going through a recovery.
However, currently, both Credit Suisse and UBS rate it as a sell with price targets of $16.30 and $14 respectively.
