If ever investors needed a sign to stay away from the iron ore sector, here it is…
The commodity extended its retreat overnight, plunging to a fresh five-year low at just US$68.49 a tonne. That reflects an incredible 49.3% decline since the beginning of the year, and it's been wreaking havoc on our miners' share prices.
Just take a look at this chart to see for yourself…
Source: Google Finance
While the larger miners, being BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), have declined by 14% each, the losses are magnified for the nation's smaller miners due to their higher costs and lower quality ore.
Arrium Limited (ASX: ARI), BC Iron Limited (ASX: BCI) and Atlas Iron Limited (ASX: AGO) have all lost in excess of 80% of their value since the beginning of the year. Not even Fortescue Metals Group Limited (ASX: FMG), Australia's third largest iron ore miner, has managed to avoid the carnage with its shares having more than halved. Following the commodity's fall in price overnight, their shares could certainly decline more in today's session, or at the very least in the weeks and months to follow.
What should investors do?
It is a common misconception among many investors that when a stock has plummeted in value, it simply cannot fall any further. Those investors are dead wrong – especially when it comes to the mining sector.
Although the smaller miners are trading at almost one-tenth of the price they were at the beginning of the year, there is every possibility they will fall even further. As the iron ore price continues to tumble, their status as a going concern is becoming increasingly stretched. At this price, some of them may not even be recognising a profit on the ore that they do produce.
There is even reason to be concerned for our bigger miners. Although I would much prefer to own one of them right now, thanks to their higher level of diversity and lower cost bases, there are reasons to suggest their shares will fall further than their current prices.
As is often said, if something looks too good to be true, it probably is. Investors would be wise to remember that there is a good reason why the miners' shares are currently trading so low, and that there is every possibility they will fall even further in the future.
