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Are the iron ore miners a buy?

With the iron ore price defying the sceptics and rising rather than falling, should you take a closer look at the iron ore miners?

Despite many analysts’ predictions that the iron ore price was heading back to US$100 a tonne, and some even forecasting a price of US$70 a tonne as a possibility, strong demand and low stockpiles have kept price above US$130 a tonne for some months now. At the current iron ore price of US$138.70 a tonne, Australian miners are achieving a price of more than A$146 a tonne.

In September 2012 the price fell as low as US$87 a tonne, thanks to seasonal issues as China headed into winter. This year has been different though, and demand has stayed strong – something not many analysts had foreseen.

For some time now, We’ve suggested that demand for Australian iron ore from China is likely to remain strong and that there were doubts about the predicted oversupply. Both factors are likely to lead the iron ore price to remain around current levels for at least the short term.

Australia’s iron ore is general higher quality than China’s locally produced ore, and is also cheaper to produce. Rio Tinto’s (ASX: RIO) and BHP Billiton’s (ASX: BHP) Pilbara operations are among the lowest cost mines in the world, and fellow producers Fortescue Metals Group (ASX: FMG) and BC Iron (ASX: BCI) are seeing their production costs fall as production rises.

Demand from China for Australia’s iron ore is likely to remain strong. Rio and BHP both expect China iron ore demand to peak at around 1 billion tonnes in around 2030.

Most of China’s major steel mills are located near the coast, near ports, while China’s iron ore mines are located inland and away from the mills. China’s mines also tend to produce lower quality ore at a higher cost – which raises other problems, including potentially adding to the pollution issues that China is struggling with.

Chinese steel mills also prefer the higher quality ore, as it means the quality of the steel produced improves.

Foolish takeaway

BC Iron is currently trading on a prospective P/E ratio of just 6.4 times, and paying a dividend yield of close to 7%, fully franked. That appears to be a cheap price for the risks involved. Foolish investors may want to add BC Iron to their watchlists.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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