The past six months have been a frustrating ordeal for the Fortescue Metals Group Limited (ASX: FMG) share price.
In the world of investing, there are few things more deflating than watching the share price of a stock you own drop precipitously. For investors of the iron ore giant, that is exactly what has played out.
Fortescue's share price has dropped a whopping 22.5% over a six-month timeframe.
So, what's behind this sharp decline? Let's take a closer look.
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Why the big tumble?
The fall in the Fortescue share price can be attributed to a number of factors. Although, one specific variable could carry the bulk of the blame.
Firstly, demand for iron ore — Fortescue's primary product — has been softening in recent months due to slowing economic growth in China, which is the biggest buyer of Australian iron ore.
Six months ago, the steelmaking commodity was going for US$154.40 per tonne. Whereas, this figure is tracking close to its 52-week low of US$92 per tonne — now perched at US$94.86. This undoubtedly would put pressure on Fortescue's margins, which would in turn weigh on the company's bottom line.
Secondly, Fortescue has up the ante in terms of its decarbonisation commitments in recent months. In September, the company announced its plan to pour US$6.2 billion into eliminating fossil fuel risk by 2030.
While Fortescue's management believes this could result in operating savings of US$818 million per annum, investors may not be so sure. Furthermore, there are concerns that this investment might mean taking a bite out of its future dividends.
Could the current Fortescue share price be a buy?
While it's never fun to watch the value of our investments decline, it's important to remember that share prices are just one metric by which to judge a company. What really matters is where Fortecue's earnings could be in the future.
Unfortunately, analysts at Goldman Sachs think those future earnings could be impacted in the near term. As a result, the team believes dividends could be squashed to 38 US cents by FY24, with more downside in the ensuing years.
Right now, Goldman has a $13.40 target on the Fortescue share price. This would suggest a further 20% downside to the company's valuation from here.
Shares in Fortescue are down 3.3% today. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) is wearing a 1.1% markdown.
