Here’s why the Fortescue (ASX:FMG) share price is up 12% in a month

The Fortescue Metals Group Limited (ASX: FMG) share price was one of the rather surprising standout performers on the S&P/ASX 200 Index (ASX: XJO) in 2020.

Last year, Fortescue delivered a 115% return to investors. This result was not including the hefty dividend payments shareholders also were happy to receive throughout the year (when, incidentally, many other ASX blue chips were slashing their payouts).

The ASX iron ore miner started 2020 at just under $11 a share, but finished the year up at just a touch over $23 a share. That phenomenal annual return was just the latest piece of good news that long-term Fortescue shareholders have been treated to. Over the past 5 years, this company has given investors an incredible return of 1,529%.

But these numbers have not prevented Fortescue from exploring new heights in recent weeks. Fortescue shares are up another 12.4% over the past month alone. The miner also hit a new all-time high share price of $26.40 a share just last Friday. So why are Fortescue shares continuing to soar of late?

Fortescue shareholders rake in the dough

Well, the most obvious reason why Fortescue shares are exploding ever higher is the soaring price of iron ore itself. As we speak, iron ore is trading for US$169.14 a tonne. That’s a level we haven’t seen since the ‘mining boom’ days of 2012.

Cast your mind back to 23 November, and iron ore was going for ‘just’ US$124 a tonne. This is obviously a massive appreciation and benefits Fortescue disproportionately. Because a miner’s costs to extract ore are relatively fixed, any extra cash the miner can get for its iron pretty much flows straight to the bottom line.

This explains why Fortescue is not the only ASX miner climbing to new perches recently. BHP Group Ltd (ASX: BHP) has also been hitting new all-time highs recently, as has Rio Tinto Limited (ASX: RIO).

But Fortescue (along with the other ASX iron miners) is also benefitting from the political landscape over in the United States. According to reporting in the Australian Financial Review (AFR), the recent US senate elections have also helped. Given President-elect Jo Biden’s Democratic party will soon control the Senate as a result of the Democrats winning two Senate seats in Georgia, the party now controls all three branches of the US government. That means that larger stimulus spending, particularly on infrastructure, is now far more likely in the next two years. More infrastructure spending in the world’s largest economy means more demand for steel. And the key ingredient for making steel is, of course, iron ore.

Is the Fortescue share price a buy today?

I’m sure there are many investors out there who are wondering if it’s too late to buy into Fortescue at these heights. One broker who thinks it might be is Goldman Sachs. This broker currently has a ‘hold’ rating on Fortescue shares, with a price target of just $20.18 a share. That implies a potential downside of almost 20% on current prices.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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