In 2013, I was certain the price of iron ore was going to fall. Absolutely certain.
But it didn't and top Australian iron ore miners notched up strong gains in the second half of the year, as the spot price went above $US135 per tonne. A price even junior iron ore miners can healthily operate at.
The biggest winner from rising spot prices was BC Iron Limited (ASX: BCI) – rising some 43% for the year. It was helped higher by increased production levels, which are expected to result in earnings-per-share of 100 cents in FY14. That will likely be followed by a dividend of 9% plus full franking. Despite the lucrative dividend and increased earnings guidance, investors have shrugged off the company and it currently trades on an earnings multiple of just five. However, like many junior miners, it remains very high risk and there is no guarantee of growing production levels in the medium to long term.
Fortescue Metals Group Limited (ASX: FMG) has been the talk of the town lately, as bullish iron ore investors rod the share price from below $3.50 per share, up to a current price at $5.15. Fortescue has recognised its ballooning debt is a major shareholder and investor issue, and has been rapidly reducing its most expensive obligations. If the iron ore price stays strong Fortescue will most likely outperform many of its peers.
Australia's biggest iron ore miner, Rio Tinto Limited (ASX: RIO), has also been focused on reducing its debt by slashing costs and ramping up production of the steelmaking ingredient. After its purchase of Alcan in 2007, shareholders have felt the pain of continuous writedowns and cost overruns. However, in my opinion it has gone beyond its lowest point and investors can now enjoy a leaner and more focused company. Despite that, thanks to poor commodity prices across the board, Rio will draw around 85% of its earnings from iron ore. Which leaves it vulnerable to an unlikely collapse in prices.
A safer option for gaining exposure to iron ore markets is through mining heavyweight BHP Billiton Limited (ASX: BHP) – iron ore is currently its most lucrative commodity. Unlike Rio, BHP has made sensible acquisitions and has continuously invested in projects across a broad range of commodities. Petroleum, copper, gold, aluminium and fertilizer are some of the company's other products. In addition to being a safer investment to its rivals, it pays a strong 3.3% fully franked dividend.
Foolish takeaway
No one can knows what the iron ore price will be in six or 12 months' time. By all accounts China's economy is still growing rapidly, albeit by a smaller percentage, but from a higher base. I don't doubt that iron ore prices will eventually fall, as all competitive price taking markets do, but if the price stays high, investors should look at these four companies as ways to profit from the huge margins in the industry.
