The program will kick off later this month and remain in place for up to 12 months.
"The share buy-back program is a natural extension of our capital allocation focus which has now clearly shifted from debt reduction following the rapid de-gearing of the balance sheet and the successful execution of our capital management strategy," FMG CEO Elizabeth Gaines said.
"With our continued strong operating performance and new investments underway, the purchase of our own shares, funded out of operating cashflows, maintains our disciplined balance sheet management.
"This is consistent with our clear business strategy of investing in our core iron ore business while pursuing growth and development and delivering returns to our shareholders."
FMG had US$863 million of cash on hand at June 30 and gross debt of $4 billion.
The number and timing of shares purchased will depend on FMG's share price and market conditions.
RBC Capital Markets analyst Paul Hissey said the market should react positively to the news.
"The FMG share price has lagged its large cap Australian peers (BHP, S32, RIO) throughout CY2018 despite the benchmark iron ore index (Platts 62 CFR) remaining at strong levels," he said.
"We continue to exercise caution on FMG, given our view that the current steel market dynamics are largely structural (underpinned by supply side reforms in China) which is driving a premium for higher grade products (and conversely discounts for lower grade products)."
According to MySteel, the 62% iron ore fines price sits at a seven-month high of $71.60 per tonne, while 58% fines are at $60.15/t.
FMG reported an average sale price of $44/t for FY18. This week Macquarie said its realised price should have risen to $47/t.
Macquarie forecasts FMG to report September quarter shipments of 40.5 million tonnes.
Macquarie retained an outperform rating for FMG and price target of A$4.70, while RBC maintained its underperform rating and $4 target.