Why are Fortescue Metal Group (ASX:FMG) shares up 8% in one week

Highlights

  • Fortescue Metal Group shares have outperformed its industry benchmark ASX 300 Metals and Mining index, which gained 6.09% in the last one week.
  • Shares of the mining giant touched a 52-week high of AU$26.58 in July 2021.
  • At current market price, FMG's dividend yield (excluding special dividend) stands at 15.34%.

Fortescue Metal Group (ASX:FMG) shares ended 2.49% higher at AU$21.4 apiece on Thursday, taking its last 5-day gains to 7.92%. The stock has outperformed its industry benchmark ASX 300 Metals and Mining index, which gained 6.09% in the last one week. What is fueling the rally in FMG shares?

As Fortescue's revenues are linked to global iron prices, its share price also moves in tandem with iron ore prices. It may be noted that shares of the mining giant touched a 52-week high of AU$26.58 in July 2021, when iron ore prices touched record high of US$220 per tonne.

Similarly, FMG shares hit a 52-week low of AU$13.90 in October 2021 when price of the crucial steel-making ingredient was under selling pressure. Eventually, iron ore prices hit a low of US$90 per tonne, in November 2021. At present, iron ore prices have witnessed some recovery and are hovering at a 3-month high of US$132 per tonne.

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What is driving iron ore prices?

According to reports, iron ore mining activity in Brazil, world's second-largest iron ore exporter, has been impacted due to heavy rains. Southeastern Brazil's iron ore industry has been disrupted because of heavy rains with Vale, world's largest producer of iron ore, pellets, and nickel, halting operations. However, regular operations continue at the Northern system, where Vale produces 60 per cent of its total annual iron ore volumes.

Open-cast mine of iron ore

Image Source: © Sergioz | Megapixl.com

With Brazil being the second-largest iron ore supplier to China, the present disruption in mining activity can push iron prices higher, traders expect.

Meanwhile, Fortescue’s Pilbara-based mines are continuing with their regular operations. This means, Fortescue is well positioned to benefit from any potential rise in iron ore prices. 

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However, the street is also closely monitoring the other aspect of iron ore pricing--demand. Analysts believe China's demand for iron ore may get impacted due to the spread of Omicron variant of Covid-19. Now, it is to be seen how the demand-supply equation of iron ore pans out. Fortescue and other iron ore exporters’ revenue and share price is linked to the demand-supply situation of iron ore.

Worth mentioning here is that Fortescue has been a good dividend-paying company. In the financial year 2021, when its net profit nearly doubled to AU$13.69 billion as against AU$ 6.89 billion in FY20, the company paid a dividend of AU$3.58 per share, double the amount it paid in FY20. At current market price, FMG's dividend yield (excluding special dividend) stands at 15.34%.

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