Why did the Fortescue (ASX:FMG) share price have such a lousy month in October?

Woman in yellow hard hat and gloves puts both thumbs down

The Fortescue Metals Group Limited (ASX: FMG) share price was out of form again in October.

During the month, the mining giant’s shares lost a further 7% of their value.

This means that the Fortescue share price is now down 42% year to date.

Why did the Fortescue share price have such a lousy month?

Investors were selling down the Fortescue share price again last month following further weakness in iron ore prices and the release of its first quarter update.

In respect to the latter, during the first quarter, Fortescue shipped 45.6 million tonnes of iron ore. This was up 3% on the prior corresponding period and a record high for the first quarter.

However, taking the shine off its strong operational performance was the price the company was commanding for its iron ore.

Fortescue revealed that its average revenue per dry metric tonne fell 30% quarter on quarter to US$118. This represents revenue realisation of 73% of the average Platts 62% CFR Index during the period, compared to 84% during the fourth quarter.

The latter essentially means the discount for the company’s low grade iron ore is widening as end users opt for higher (and less polluting) grades.

And while a widening of this discount was expected by the market, it wasn’t expecting a realisation as low as 73%.

For example, according to a note out of Goldman Sachs, its analysts (and the consensus estimate) were forecasting a price realisation of 77%.

Goldman commented: “FMG shipped 45.6Mt of iron ore in the Sep Q (-2% vs GSe) at an average price realisation of 73% vs. the 62% Fe benchmark, below GSe/consensus (77%) on provisional pricing impacts. Production of the higher grade 60% Fe West Pilbara Fines (WPF) declined to 3.7Mt or 8% of the product mix, well short of the targeted 15-20%, despite the new Eliwana mine now fully ramped-up to 30Mtpa.”

In response, Goldman retained its sell rating and cut its target on the Fortescue share price down to $11.00.

If Goldman is on the money with its recommendation, the Fortescue share price could still have 23.5% to fall before it bottoms. This could potentially make November another tough month for the mining giant’s shares.

The post Why did the Fortescue (ASX:FMG) share price have such a lousy month in October? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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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