Lately, iron ore stocks have been a contentious topic in investing circles. Many have questioned Chinese growth, supply, demand and, inevitably, the price of iron ore.
It should be noted, however, that I am bearish on many iron ore stocks. I’m a firm believer that any stock (whether in mining or not) that isn’t growing profits, doesn’t have a solution to mounting debt and pays a comparably poor dividend is not worth investors’ time and more importantly, their money.
Despite Rio Tinto’s (ASX: RIO) best efforts to cut debt by selling assets, opening a huge copper and gold mine in Mongolia and expanding its Pilbara iron ore assets considerably, it is (at current prices) best left on the watchlist. Rio’s massive earnings from iron ore mean that any considerable drop in spot prices leaves it with a huge downside risk. At $60 per share, Rio isn’t a bargain and Foolish investors only deserve the best.
Rio’s biggest competitor is BHP (ASX: BHP). BHP has a much more diversified asset base but draws large amounts of revenues from its iron ore business. If investors wanted exposure to iron ore, slightly better balance sheets, smaller downside and a stronger dividend, then BHP is the way to go. At current prices, BHP’s oil assets and iron ore earnings make it a better buy than Rio. As Foolish investors know however, the best time to buy a stock is at its cheapest; whether BHP will fall in the short term is anyone’s guess.
Fortescue Metals Group (ASX: FMG) is another contender for iron ore investment although it has a debt problem. In the last year, investors have been drawn to the company’s 44% increase in volumes and forgotten about the commodity analysts who are expecting iron ore spot prices to drop as low as $80-90 per tonne in the short to medium term. Fortescue’s debt to equity has risen to 240% in the past few years but its share price has risen 56% since June, at current prices this Fool isn’t adding Fortescue to any portfolios.
According to many stock market commentators, small or mid cap iron ore stocks will be the first to go belly up if the price of iron ore drops because they usually have a higher cost of production. Atlas Iron (ASX: AGO) has failed to impress investors this past year, dropping 40% in price.
Shareholders have been hoping the company can secure rail freight access because haulage is proving to be costly. In an October investor presentation the company stated that it is generating margins of approximately $40 per wet metric tonne based on current exchange rates, freight and iron ore spot prices. Lately however the price of iron ore has been strong and resilient at above $130 per tonne — something even the miners are expecting can’t go on for too long.
BC Iron (ASX: BCI) is a smaller miner that has access to rail infrastructure through a joint venture with Fortescue, which has worked very well for the company. In the past year its share price has risen 77% but it could go higher — Macquarie recently put a target price of $5.10 on the stock. It pays a dividend of 8.8% fully franked and has solid growth prospects both in Australia and overseas.
It’s not timing the market but time in the market that’s important. Investors who believe the commodities super cycle is at its lowest point could stand to make a lot of money but for those of us who would rather take a conservative approach, there’s still plenty of other opportunities available on the market that have good long term upsides and yield great dividends.
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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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