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Is it time to buy iron ore stocks?

Even people who are paid to predict the price of commodities have a tough time giving an accurate forecast of the iron ore price.

In 2013, the price of iron ore was supposed to drop to below $100 per tonne. It didn’t. Some analysts are predicting the spot price to average $US120 per tonne for 2014, while others are expecting the collapse to occur anytime soon.

Recently, the price of the steelmaking ingredient has dropped as China – the biggest importer of iron ore – moves into its holiday season. So is now the time to add some top iron ore miners to your portfolio? Let’s take a look at what each have to offer.

As it is soon to be the world’s biggest producer of iron ore, Rio Tinto Limited (ASX: RIO) is perhaps the smartest play for investors looking to capitalise on the return of the high iron ore price. However, its former management has proven how destructive poorly thought out decisions in the resources sector can be.

But with new management at the helm, it appears Rio is now doing everything right. Cutting costs, capex, non-core assets and reducing debt whilst increasing production is all you can ask a miner to do and, so far, CEO Sam Walsh has done just that. Rio claims to be able to dig up, transport and ship iron ore from the Pilbara for less than $US50 per tonne.

The second biggest iron ore miner in Australia is BHP Billiton Limited (ASX: BHP). It’s also the most diversified. Which, in a sector where prices of products can vary day-to-day, is a positive for risk-averse investors. It recently reiterated it production targets for iron ore, petroleum, copper and coal. West Australian Iron Ore (WAIO) achieved record half-year production of 108 million tonnes.

Despite Rio’s title as the biggest producer of iron ore, Fortescue Metals Group Limited (ASX: FMG) is perhaps the most famous for it. Fortescue is quickly shedding mountains of debt from its balance sheets as it reaps the rewards of a higher iron ore price and growing production. After paying down debt, Fortescue could look to increase production well above its current 155 million tonnes per annum, or cut costs by investing in technology. It has a break-even cost of approximately $US70 per tonne.

Smaller miners such as BC Iron Limited (ASX: BCI), Mt Gibson Iron Limited (ASX: MGX), Arrium Ltd (ASX: ARI) and Atlas Iron Limited (ASX: AGO) are more at risk if we experience a collapse in the price of iron ore because they have higher costs per tonne and less ability to scale-up production. However, BC Iron’s increasing production levels and huge dividend yield make it very appealing to bullish iron ore investors.

Foolish takeaway

Australia’s three biggest iron ore miners will continue to make money even if the price of iron ore drops to $US100 per tonne. If you’re bullish on the spot price, Fortescue and Rio will be rewarding, whereas BHP is a much more diversified miner, therefore the downside risk is mitigated – as is the upside. During the Chinese holidays (which will last until February) the price of iron ore may fall further, which could present a buying opportunity for savvy investors.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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