The Fortescue Metals Group Limited (ASX: FMG) share price has done very well since the end of October 2022. It has risen by around 50% since then. But here are a couple of key reasons why I think the ASX mining share could still be cheap.
Don't get me wrong, I'd much rather invest in the ASX iron ore share at a price under $17 compared to its current price of around $22.50.
Certainly, buying at a lower price would give us a better margin of safety.
However, it's good for Fortescue shareholders that the company's share price has recovered so much, despite the iron ore price only trading at around US$120 per tonne currently. It is possible that the commodity price could rise if China's economy keeps recovering, though I wouldn't count on the iron price going up.
However, there are two good reasons why the Fortescue share price could keep rising even if the iron ore price doesn't go any higher.
More production
There are a few elements to how much profit that Fortescue can make from its iron division.
It doesn't have much control over the iron ore price. This is heavily impacted by the relationship between supply and demand for the commodity. Certainly, it would be beneficial for Fortescue if another country, such as India, wanted to buy more iron ore.
The next element is the cost of mining the iron ore per tonne. Fortescue has done a good job of keeping its costs low, with automation playing its part (such as automated trucks). C1 costs were US$17.43 per wet metric tonne (wmt) in the first half of FY23, compared to average revenue of US$87.18 per dry metric tonne.
But what I'm excited about for Fortescue is that its production can keep growing. Its HY23 ore shipments rose 4% to 96.9 million tonnes (mt). Fortescue's market capitalisation could rise if its operations keep producing more. BHP Group Ltd (ASX: BHP) produced 132 mt in the HY23 result, though BHP produces other commodities as well.
Fortescue is now very close to production at its higher-grade Iron Bridge project which aims to produce 22mt per annum of iron. The increased earnings from this could provide a real boost for the Fortescue share price, as long as the iron ore price doesn't drop.
Green energy efforts
Fortescue is also making excellent progress on its green hydrogen project plans, with a number of projects getting close to the go-ahead.
At this early stage, there are still plenty of risks involved in executing these projects. But Fortescue says it has lined up customers to buy its production of green hydrogen, including E-ON, JCB, and Ryze.
Why does this make Fortescue cheap? Company founder and chair Andrew Forrest revealed last year that Fortescue had been approached by investment banks suggesting Fortescue Future Industries (FFI) could be worth US$20 billion if it went through an initial public offering (IPO) process.
It's anyone's guess what FFI may be worth right now. But if we said the investment banks were being too ambitious and that FFI could instead be worth A$20 billion (after the last six months of progress), that would represent more than a quarter of the current Fortescue market capitalisation of $69 billion, according to the ASX.
Certainly, I think the Fortescue share price would look cheap if it were reduced by the underlying FFI value.