3 reasons why the Fortescue share price could be a buy

The Fortescue Ltd (ASX: FMG) share price has seen lots of volatility in the past several months, as the chart below shows, though it hasn’t moved too much since the start of the year.

But, the ASX mining share has seen a significant rise over the past 12 months, as the chart below also shows.

It’s very difficult to predict what’s going to happen with ASX iron ore shares because of how much they rely on the iron ore price. Both global demand and supply can shift quite significantly, partly because of Chinese demand and because of uncertainty related to supply shifts from Africa and South America.

While I’d love to invest at a Fortescue share price below $15 (seen less than a year ago), I think the company still has multiple positives.

Strong iron ore price

The iron ore price plays a massive role in how much profit Fortescue makes each year, both positively and negatively, due to operating leverage.

When the iron ore price goes up, most of those extra revenue dollars can turn into net profit dollars, aside from paying more to the government. Its production costs don’t typically change much month to month.

The iron ore price was expected to be weaker by now due to concern over the Chinese economy’s demand and increasing iron ore supply from Africa. Despite that, the iron ore price has been resilient amid all of the global economic uncertainty.

According to Trading Economics, at the time of writing, the iron ore price is currently sitting at around US$110 per tonne, which allows it to deliver significant profit generation. The market may be underestimating how much profit the company can make in the foreseeable future.

Copper expansion

I don’t know what the long-term iron ore price is going to be. It could still fall from here.

So, I think it’s a smart idea that the business is looking to build exposure to copper. Only a small part of the company’s underlying value relates to copper at this stage. But, not only is diversification a good idea, but copper also has a pleasing outlook due to electrification, decarbonisation, energy grid expansion, data centre growth and so on.

Fortescue said that copper is a “core pillar” of its “growth and diversification strategy”. It recently completed the acquisition of Alta Copper, securing ownership of its portfolio of exploration assets, including the Canariaco Copper project in Northern Peru.

In the long-term, copper could be a very useful contributor to the overall earnings picture.

Pleasing dividend yield

Fortescue is known for paying large dividends and it could continue providing a solid dividend yield for investors.

According to the projection on Commsec, the business could pay an annual dividend per share of 80 cents in FY27. That translates into a grossed-up dividend yield of 5.4%, including franking credits, at the time of writing. The FY26 grossed-up dividend yield is forecast to be almost 7%, including franking credits.

Combine the passive income with the potential for increasing copper earnings and solid iron ore profits – that’s an appealing mix.

But, there may be many other ASX shares that could be even better buys today.

The post 3 reasons why the Fortescue share price could be a buy appeared first on The Motley Fool Australia.

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• How I’d aim for a 7% dividend yield in a SMSF

Motley Fool contributor Tristan Harrison 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 Scott Phillips.