The Fortescue Metals Group Limited (ASX: FMG) share price went through a sizeable decline in April 2023. The ASX iron ore share dropped by 7% over the month. That compared to a 1.8% rise for the S&P/ASX 200 Index (ASX: XJO).
It was a rapid decline of 8.7% between 19 April 2023 and 26 April 2023 that affected the performance for the month. Fortescue shares then rose by 1.4% from 26 April to the end of the month.
Iron ore price drops
Fortescue is a very large iron ore miner, so any change in the iron ore price can have an impact on the ASX mining shareâs profitability and the Fortescue share price.
The company digs iron ore out of the ground. The cost to mine 1 million tonnes of iron ore doesnât change much from month to month. So, any extra revenue for that production largely boosts the net profit after tax (NPAT) aside from paying more to the government.
But, a fall in the iron ore price and revenue largely cuts straight into NPAT as well.
The iron ore price had been sitting at around US$120 over the prior two months. But, over the time period of 19 April to 26 April, the iron ore price dropped to around US$105. Thatâs a fall of over 12% in a short amount of time.
While most of FY23 is already done, if the iron ore price stays at this level then FY24 could see lower monthly profitability.
Knock-on effect to Fortescue Future Industries (FFI)
FFI is the division within Fortescue that is trying to create a global portfolio of projects that produce green hydrogen and green ammonia. This can provide a zero-carbon fuel source for heavy machinery like mining vehicles and boats. This division could have a positive impact on the Fortescue share price in the future as it grows.
However, the idea is that Fortescue allocates 10% of its NPAT each period to FFI to fund its activities. Lower profit for Fortescue could mean that FFI needs more than 10% of NPAT to fund its ambitions.
But, there is another factor that decides how much iron ore profit Fortescue makes â production.
Iron Bridge starts production
Yesterday, the iron ore ASX share announced that the Iron Bridge project had started production.
This project will produce 22 million tonnes per annum of high-grade magnetite concentrate.
Fortescue explained:
Iron Bridge signifies Fortescueâs entry into the highest-grade segment of the iron ore market, providing an enhanced product range while also increasing annual production and shipping capacity.
The boss of the mining division of the company, Fortescue Metals CEO Fiona Hicks, said:
Iron Bridge is a significant differentiator for Fortescue. It demonstrates our commitment to long-term planning and the sustainability of our iron ore business, while also investing in growth. We are committed through the cycle to delivering robust returns to our shareholders and building an increasingly strong balance sheet.
Fortescue share price snapshot
Between the start of 2023 to the end of April, Fortescue shares had risen by more than 2%.
The post Why did the Fortescue share price tumble 7% in April? appeared first on The Motley Fool Australia.
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More reading
- Dalio says US and China ‘on brink of war’. Which ASX shares could be impacted?
- How I’d generate $400 in monthly passive income from 2 ASX 200 iron ore shares
- Looking to buy ASX 200 iron ore shares? Here are 5 reasons not to
- Did Fortescue really just buy 60,000 sheep?
- Be careful, the Fortescue share price is overvalued: Goldman Sachs
Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. 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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