Falling iron ore price causes more pain

The S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) has closed down 0.6% – again, following on from yesterday’s similar fall. The index ended at 4,275.8, down 27.7 points. The resources sector led the way down, falling 1.7%, while the healthcare sector went against the trend, posting a 2% rise.

These three resources-related stocks were hammered.

Boart Longyear Limited (ASX: BLY) shares fell 12.2% today, to close at $1.115. In the last five days, the stock has lost more than 50%. Just five months ago, the stock was trading over $4. Fear has gripped the mining services market, since the big miners announced that major projects were being cut-back, cancelled or postponed. Despite the share price falls, the company is still expected to produce earnings per share of more than 30 cents in the 2013 financial year, and perhaps no surprise that three separate directors purchased shares in the company yesterday.

Fortescue Metals Group Limited’s (ASX: FMG) chairman, Andrew ‘Twiggy’ Forrest can’t take a trick. Last week he purchased 10 million shares in the company on market. Since that time, shares have tumbled from over $3.60 to close at $3.12, including a fall of 8.5% today. Today the company announced that it had sold the Solomon power plant to TransAlta Corp for $318 million, on the back of capital expenditure cuts of $1.6 billion yesterday, but still the price keeps falling. Analysts are now speculating that the company may need to  raise equity, something the company ruled out last week as being too expensive. At a personal level, Mr Forrest may not want to do that, as it’s likely to dilute his stake in the company. I suspect there’s yet more to come in this saga.

OneSteel, sorry, Arrium Limited (ASX: ARI) also saw its shares fall dramatically today, losing 10% to end at 58.5 cents. Having changed its spots from a steel producer to an iron ore miner, the company appears to have jumped from the pan into the fire  – as we warned back in February. With iron ore prices falling so dramatically over the past few months, the company could now be at risk of breaching its debt covenants.

The Foolish bottom line

Mining company CEOs and several politicians have expressed the view that the mining boom is not yet over, and some have predicted the iron ore price will rise back up to between US$120 and US$150 a tonne, before the end of this year. Only time will tell.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.


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