The Fortescue Metals Group Limited (ASX: FMG) share price is coming under pressure as the iron ore price collapses.
What’s happening to the Fortescue share price?
Since 29 July 2021 the Fortescue share price has fallen by around 23%. That’s before today’s price change.
Resource businesses can generate a lot of profit from their commodity if that resource is priced really highly. The iron ore price was well north of US$200 per tonne several weeks ago, with a peak of around US$230 per tonne.
However, the iron ore price has sunk to US$143 since that peak, with that decline being assisted by an almost 7% decline over the last day.
Obviously it’s not normal for the Fortescue EBITDA margin (EBITDA explained) to be as high as 73% as it was in FY21 – that was an increase from 61% in the prior year.
Will the Fortescue share price fall even further? It certainly could. The iron ore price remains elevated compared to historical levels. Even US$100 per tonne of iron ore would still be a solid price for the commodity.
One of the main things that could be stopping an even bigger fall is the Fortescue FY21 final dividend. It has an ex dividend date (ex dividend explained) of 6 September 2021, which means shareholders before that date get the $2.11 per share dividend – that’s a fully franked yield of 10.4%. So it wouldn’t surprise me much to see the Fortescue share price drop by double digits next week.
The Australian Financial Review recently reported that the manufacturing purchasing managers index in China declined in August to 50.1, which was reportedly lower than expected. The AFR quoted an analyst that said this was due to weaker Chinese production and demand.
Are there any positives for the Fortescue share price?
Fortescue can’t do much about the iron ore price, though new projects like Iron Bridge could help with more & higher quality iron ore.
I thought it was interesting that Fortescue Chair Andrew Forrest sees Fortescue’s future in renewable energy and other green initiatives. I’m sure iron ore will still generate lots of profit for the company, but over time it seems the focus is going to shift. There is a huge investment opportunity in the world turning green, so Fortescue may be able to capitalise. This could drive Fortescue over the coming years. Or be a big distraction, time will tell if it’s successful.
Valuation
Without knowing what the iron ore price will be, it’s hard to estimate future profit. But, using CommSec numbers, the Fortescue share price is valued at 9 times the estimated earnings for the 2023 financial year (which assumes a major profit reduction from from FY21).
