Fortescue has had a terrific run over the last couple of years, and recently peaked at $26.40. It’s dropped back to the 20s, and the company’s profits very much follow the price of iron ore.
No matter what happens, I believe FMG still represents good value, and here’s why I think so:
- Low P/E multiple: FMG is currently trading at 6x earnings and pays out a whopping dividend yield (trailing) of 13%. Sure, we’re making hay in the short term but these are typically the returns you’d see from an absolute junk business, not a high-quality mining operation.
- Inflation: The US alone has printed nearly $10 Trillion in the last year – 50% of their GDP. If this causes inflation, high iron ore prices are likely to stay.
- New Ventures: Fortescue has a number of exploration ventures, which, if successful, will be able to be funded from the cash being generated from the iron ore business. Fortescue Future Industries also has significant potential upside with new green energy and manufacturing green steel using new chemical processes that don’t rely on metallurgical coal.
FMG’s golden run of high iron ore prices may not last forever, but it might in a high-inflation environment. Meanwhile, you’re getting a very cheap, high-quality business with a couple of large speculative upside opportunities – from a company that knows how to challenge the establishment in industries where it is a non-incumbent.