Iron price falls, but miners soar: What’s an investor to do?

Is it time to buy, sell, or wait?

Despite the price of iron recently hitting a seven-month low, big ASX-listed miners like BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are still trading within a hair’s breadth of 52-week highs.

Fortescue Metals (ASX: FMG) shares are still up 15% on the year, and effects on smaller miners has been mixed. Mount Gibson Iron (ASX: MGX) is trading around 52 week highs, BC Iron (ASX: BCI) is at an all-time high, and Atlas Iron (ASX: AGO) is down 37% over the past 52 weeks.

Some analysts predict iron ore to spike again when the Chinese return to work after the Chinese New Year holiday, but this is a short-term concern. Looking further out, it is interesting to note that a majority of analysts, including some major iron companies such as Brazil’s Vale Mining (NYSE: VALE), predict that iron will trend downwards over the next two years. Vale expects iron to hover around a long-term price of $100, but Goldman Sachs predicts the price could fall as low as $80 in 2015. The latter eventuality in particular is bad news for everyone involved and a number of junior miners will find it difficult to retain decent earnings at $100/ tonne, let alone $80/tonne.

I wrote an article at the end of December explaining why I’d sold half my iron portfolio in the face of potential oversupply from 2015. I have retained two shares – BC Iron and Rio Tinto, the former for its low cash costs ($46-50 per wet metric tonne before royalties and other expenses), and the latter for the same reason along with its huge reserves and expansion program. Despite the forecasted fall in prices, Rio shares have languished over the past few years (I bought at $90) and I expect its expansions and return to profitability to make agreeable changes to its share price.

As I stated in my December article, individuals with heavy iron exposure should be looking to redirect some funds away to safer iron companies, or companies in other sectors such as Woolworths (ASX: WOW), which, incidentally, has great prospects for 2014. Prospective buyers might be better off waiting up to 18 months for a better time to pounce; this will also let you gather more information as to how each company is going to handle its production and debt in the face of lower revenue.

Foolish takeaway

Of the iron companies, my personal choices are Rio Tinto for strong straightforward iron exposure and low production costs, BHP for iron exposure with diversification, and BC Iron for its high (7.4%) dividend and low-ish production costs.

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Motley Fool contributor Sean O’Neill owns shares in BC Iron and Rio Tinto.

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