I would only sell my Fortescue shares if this happened

Fortescue Metals Group Limited (ASX: FMG) shares are an important part of my portfolio. I have previously outlined why I decided to buy the company’s shares and how long I plan to hold them.

Currently, I’m receiving a large dividend from the S&P/ASX 200 Index (ASX: XJO) mining share. This is because Fortescue is generating significant net profit after tax (NPAT) and cash flow, enabling it to pay a juicy dividend to shareholders and continue to invest in its green division, Fortescue Future Industries (FFI).

Over the long term, I’m hoping that Fortescue can generate sizeable profits from the production and sale of products such as green hydrogen, green ammonia, green iron, and advanced batteries.

However, there are a few situations where I could see myself selling my Fortescue shares — or at least thinking about it.

Demerger

It was recently in the news that Fortescue chair Andrew Forrest revealed that Fortescue Future Industries may already be worth US$20 billion. This is “if solicitations from investment banks for an initial public offering (IPO) of the division were any guide to its valuation”, as reported by the Australian Financial Review.

Shareholders would probably realise significant value from a Fortescue demerger because it would mean that investors could properly value FFI and the company’s mining segments separately. It wouldn’t surprise me if some investors who just wanted the mining segment were unenthusiastic about getting FFI as part of the deal, so the combined value of the two businesses could rise on a demerger.

However, if I were left with Fortescue shares and FFI shares, I would very likely sell shares of the mining business.

There would also be a major question of how Fortescue Future Industries would fund its green endeavours. At the moment it gets 10% of Fortescue’s NPAT each year, plus access to the sizeable balance sheet.

I think Fortescue is better off staying a combined business for the long term.

Stopped paying dividends

Dividends aren’t everything with investing, but I like the investment income because of the additional cash flow it provides into my bank account for whatever purpose I decide, including re-investment into other opportunities.

Every single one of my holdings pays dividends, though I’m searching for total returns from my portfolio, not just dividends.

If Fortescue did stop paying dividends then I would need to evaluate how long the dividends were going to be halted and why. Would it have stopped because its financial position is in danger and it’s overloaded with debt? Or is it investing all available dollars into the green FFI opportunity, which could pay off in the long run?

It wouldn’t be a definite thing I’d sell in this situation, but I’d certainly think about it.

China stops buying Australian iron ore

For me, this is the biggest risk facing Aussie miners. If China stopped buying Australian iron ore, it would make me evaluate my holding of Fortescue shares.

China reportedly buys a sizeable majority of the global iron ore production each year. What would happen if China stopped buying Aussie iron? We have seen how it was willing to put tariffs on a number of other Australian exports, such as wine.

China has continued to buy Australian iron ore. It has been dependable during the COVID-19 pandemic, it’s geographically closer to China than Brazil is, and there isn’t really a replacement option (at this stage).

However, China is reportedly working on a plan to reduce its dependency on iron ore, according to reporting by the Australian Financial Review. African iron ore could become a competing force as well. Fortescue itself is looking to start an African iron ore project which could mitigate some future issues for Fortescue.

Finally, what would happen if China decided to invade Taiwan? That is definitely not a certain event — and I hope it never happens — but it has crossed my mind what the geopolitical and economic consequences of that could mean for Fortescue’s biggest customer.

Foolish takeaway

I’m planning to hold my Fortescue shares for years, perhaps decades, but I think it’s a good idea to assess some situations before they happen, where it’s possible I may want to sell.

The post I would only sell my Fortescue shares if this happened appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. 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 Scott Phillips.

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