BC Iron versus Rio Tinto

Small miners might seem more dangerous, but this one could be worth the gamble.

a woman

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With a market capitalisation of only $497 million, BC Iron (ASX: BCI) is a small fish in a very big pond. It competes with the likes of Rio Tinto (ASX: RIO), BHP (ASX: BHP), Mount Gibson Iron (ASX: MGX), Atlas Iron (ASX: AGO) and a plethora of other iron miners both domestically and internationally.

Although I may be overly bearish on iron ore miners, BC Iron is a stock that has filled a position in my portfolio until recently (selling it has proved to be a mistake). In July I said it was one of the best iron stocks on the ASX. Since 2009 the stock has risen from around $0.20 to open today at $4.15 however the good news is, it could well keep climbing.

atlas
Source: Google Finance

About BC Iron

BC Iron is an iron development and mining company that has a number of key projects in Western Australia. Currently its core project is the Nullagine Iron Ore Project which is a 75:25 joint venture with Fortescue (ASX: FMG). The JV works well for both companies.

The Nullagine project is approximately 1,400 km north of Perth but its relationship with Fortescue has allowed it to use the mining and infrastructure giant's railway. Using rail, as opposed to haulage, greatly reduces the cost of production.

Fundamentals and strategy

Last year, cash costs ranged between $40-$44 per tonne – a very good cost for such a small mine – compared to Atlas, a miner twice its size that realises cash costs between $49 and $53 per tonne.

BC Iron announced a fully franked 35-cent full dividend, representing a yield of around 9% per annum. BHP pays shareholders 3.3%. At current prices, BC Iron trades on a multiple of earnings around 6.27. Rio trades around 13.5.

Over the past year, the company paid down US $30 million of debt ahead of schedule and has a current debt to equity ratio of 47%. Fortescue's debt to equity ratio is around 240%!

Foolish takeaway

This Fool thinks BC Iron is still one of the best up-and-coming iron ore miners on the ASX, however it isn't without it risks. The biggest of these is a deflated iron ore price as a result of increased supply that is expected to outweigh demand in coming years. BC Iron's strategy is to produce between 5.8 and 6.2 million wmt in FY14 and will use its superior balance sheets to consider other opportunities for shareholders.

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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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