Iron ore has declined approximately 39% so far in 2014 — even more since its top four years ago — and bearish sentiment is shared widely:
Market Watch blog (9/22/14): The iron ore industry is headed for a brutal shakeout as prices collapse
Bloomberg (9/23/14): Iron Ore Price Outlook Cut Again by Australia on Supplies
Bloomberg (10/7/14): Cliffs Natural Resources Inc. (CLF), the largest U.S. iron miner, was cut to junk by Standard & Poor’s after the commodity price tumbled…
Mining.com (10/16/14): Iron ore price crushed again
Moody’s (10/17/14): Iron ore prices have collapsed. With slowing global steel-production growth rates, iron ore prices remain vulnerable to the downside and we expect continued volatility.”
Sydney Morning Herald (10/19/14): Iron ore price constrained by output surge
Business Spectator (10/19/14): Iron-ore weakness to persist: BHP
Business Insider Australia (10/19/14): The World’s Biggest Iron Ore Miner Says Lower Prices Are Here To Stay
A bearish consensus, after such a large price drop in iron ore, is actually a bullish sign from a contrarian perspective. This bearish sentiment has taken its toll on the stock prices of iron ore companies. Cliffs Natural Resources (NYSE: CLF) has plunged nearly 70% this year. Fortescue Metals Group (ASX:FMG, OTC: FSUGY) and Vale (NYSE: VALE) aren’t far behind.
And yet on a fundamental basis, stockpiles in China are contracting – demand in outstripping supply – and high cost production within China is decreasing.
The stock charts for mining countries and mining stocks appear strong, as does China, the largest consumer of mined product.
While further downside is a possibility, iron ore prices are at a natural stopping point and appear to have begun a turn around. There are several companies worth speculating on at this point. Even if the bottom is not yet in, or if prices don’t rebound significantly, the best run companies can still be profitable investments.
Cliffs would seem a natural company to purchase since it is the largest iron ore miner in the U.S. and its stock price has decreased the most, however, there may be other factors at play. The bond market is speaking loudly against Cliffs as its bonds yield nearly three times the yield as the bonds issued by Vale; this is disturbing. The U.S. stock market has also topped and all U.S. stock prices will face some strong headwinds, regardless of the fundamentals.
Related to Cliffs, the Mesabi Trust (NYSE: MSB), paying a posted dividend of over 18%, looks very tempting, however, all royalty income comes from the Northshore Mining Company, a subsidiary of Cliffs, which has been shut down in the past. Additionally, the timing of the dividend payouts has led to a misleading stated dividend yield when, in reality, it is really one-half the stated yield – stay away.
BHP Billiton, Ltd. (ASX: BHP, NYSE: BHP) and Rio Tinto, PLC (LSE: RIO, NYSE: RIO) are extremely large and well diversified. I would choose BHP over RIO as its dividend is almost an extra ½%, its stock pattern is better and it is primarily an Australian stock which should help.
Atlas Iron, Ltd. (ASX:AGO, OTC: AGODY), though almost a pure play, is very small compared to others and the shares are very thinly traded in the U.S., but for those who can purchase shares directly on the ASX, it is a worthy investment.
My top pick is Fortescue Metals Group (ASX:FMG, OTC: FSUGY) with a 5.5% dividend yield and only a 20% payout ratio. The trailing PE is less than 4 and the return on equity is over 40%. Despite the multi-year fall in iron ore prices, both sales and earnings have steadily increased each year for the past five years. For the year ending June 30, 2014, revenues are up 44% and net profits up 56%.
Volume for U.S. based trading is good enough; though make sure to place a limit order. Of course, if you can make the trade on the ASX, please do so. The current price is $6.327 USD. This stock can easily be over $20 share in several years, and a $30+ share price has a better than 50/50 chance. With an excellent dividend and high growth prospects, this is a stock worth buying and holding for several years.
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