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Investors are turning on Fortescue because of its strong China ties

CANBERRA, AUSTRALIA – MAY 12: Andrew Forrest of Fortescue Metals watches Australia’s Federal Treasurer Wayne Swan speak during his post-budget address at Parliament House on May 12, 2010 in Canberra, Australia. Swan last night delivered the federal budget for 2010-11 announcing a $40.8 billion deficit, forecast to return to surplus in 2012-13. (Photo by Mark Nolan/Getty Images)

At just $1.46 a share, Fortescue stock (FMG) is at its lowest level since 2008 when founder Andrew Forrest fought hard to keep his company afloat.

Since then he has strengthened ties with China, experimented with using yuan in its trades, and added token Chinese steelmaker Hunan Valin onto its share registry.

It’s these strong ties into China, which Forrest cultivated, that have helped the company counter the slings and arrows the market has thrown at the company as iron ore has collapsed in the past few years.

But while iron ore has recovered over the past two months, the FMG share price is still languishing at post-GFC lows.

FMG stock price weekly – reuters Eikon

That’s because FMG’s strong ties in China are now being viewed as a key risk for the company, the Wall Street Journal reported overnight.

Investors are worried that China’s move toward a greener, cleaner economy means that FMG’s iron ore, which is of lower grade than its bigger rivals BHP, Rio, and Vale, will suffer lower demand and prices.

“Most of its output is sold roughly in line with the 58% Fe price, and a widening discount could squeeze cash flow and profit margins. That would restrict its ability to pay down debt, which stood at a net US$6.6 billion at the end of September,” the Journal reports.

A FMG spokesman refuted this assertion, telling the Journal: “Our customers manage their environmental performance closely and have no issues with our products from an emissions perspective.”

But Steve Johnson, chief investment officer at Forager Funds Management, said: “The more exposed you are as a miner to Chinese infrastructure, the more trouble you are in.”

Johnson added that the price will keep falling until the miners reduce production. ““The price is going to keep falling until that happens, and it is not going to be BHP or Rio that have to take that step,” he said.

You can read more here.

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