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Which iron ore miner will rise most in 2014?

Many extremely knowledgeable people forecasted the end of the mining boom in 2013-14 and a sharp drop in the iron ore price to between $80 and $100 per tonne. As we all know, the iron ore price has remained well above $110 for most of the year supporting increased production, growing profits, and soaring share prices of some of Australia’s biggest miners.

Instead of a reversal in mining capital expenditure in 2013, recently released quarterly data from the Australian Bureau of Statistics shows that there was a 5% increase in investment in the quarter, following a 2% increase in the June quarter. Incredibly, this is a new record, more than 12 months on from when the mining boom was supposed to end.

Additionally, data from the government’s Bureau of Resources and Energy Economics (BREE) shows that mining investment hit a new high in October. Based on this investment, BREE has forecast an 8% increase in iron ore exports from the major producing counties in 2013, and a 20% increase over 2013-2014. The increase in capacity and exports has been taken up by China, with iron ore exports to China recently hitting an all-time high.

All of this bodes extremely well for Australia’s big miners. Fortescue Metals (ASX: FMG) have recently hit its expanded output target of 155 million tonnes per year, while Rio Tinto (ASX: RIO) and BHP (ASX: BHP) have plans to expand production from the Pilbara by over 110 million tonnes per year, and Gina Rinehart’s Hancock Prospecting is well on its way to producing 55 million-tonnes-per-year from its Roy Hill project.

With the new supply expected to come online in the second half of 2014, analysts expect the iron ore price to stay high for the time being, supported by restocking in China as steel demand remains strong.

There are rumblings that having recently repaid some debt and achieved its 155 million tonne per year target, Fortescue may consider a further expansion up to 355 million tonne per year target. If approved, the decision could pave the way for further share price gains if iron ore prices are supportive in the medium term.

Foolish takeaway

Since hitting 12-month lows in July this year, Rio and BHP are up around 20%, while Fortescue has outperformed all rivals, up over 80%. Despite rising strongly, Fortescue has the greatest potential for gains in 2014 if iron ore prices remain high.

Analysts are unusually divided about the true value of the company. Share price forecasts range from a 30% drop to $3.80 and a 35% rise to $7.50, making investment in Fortescue particularly risky as it is so dependent on the value of the Australian dollar and iron ore.

The Australian dollar is a particular strong catalyst, at the current exchange rate the iron ore price of $US135/tonne corresponds to $A147/tonne, whereas earlier this year it converted to $A128/tonne.

Is Fortescue too risky?

Investors in Fortescue have been on a rollercoaster ride in recent years as operational failures and a volatile iron ore price have pushed the share price between $12.13 and $2.87. If you're interested in stocks paying a big, reliable dividend, you should discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool contributor Andrew Mudie owns shares in BHP.

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