Is it too late to buy BC Iron Limited?

This iron miner grew its first-half profit by 808%.

It’s been a stellar 12 months for recent ASX 200 alumnus, miner BC Iron (ASX: BCI), which announced recently that its net profit was up 808% in the second half of 2013 compared to the second half of 2012.  Most of this increase is due to increased ownership of its flagship mine, the Nullagine Joint Venture, from 50% to 75%, although production also rose 20% to 6 million tonnes per annum (Mtpa) in the same period.

BC Iron’s share price has risen from around $3 to its current price of just under $5, though it was trading as high as $5.50 recently. Shareholders for the past year have enjoyed not just solid capital growth, but outstanding dividends in this same period, with a total of 35c paid to investors last year – more than 10% of its purchase price 12 months ago.

A first-half dividend of 17 cents per share was announced, which indicates that BC Iron looks set to deliver a dividend of around 7% for the full year at current prices. Disappointingly, its payout ratio dropped from 90% last year to ‘between 30-50%’ from now on, however this is necessary to fund several capital expenditures, exploration in Brazil, and debt repayments.

Speaking of debt, BC Iron also repaid $37.7 million of debt ahead of schedule, down to $65.6 million. Future years and the reduction in payout ratio should see the company pay off its debt ahead of schedule and hopefully build a nice nest egg.

Fluctuations of the US dollar against the Aussie dollar also appear to have helped BC Iron’s bottom line, with the average exchange rate for the last six months at $0.9214 USD – an improvement of 10% on the previous two reporting periods. All-in cash costs going forward look set to be in the range of $46-50 per wet metric tonne, and the company again reaffirms production targets of 5.8-6.2Mtpa despite recent heavy rains in January and February.

The biggest threat to BC Iron’s continued strong results are weakening iron prices, although its production prices and output are low enough and apparently weather-resistant enough for me to rank it alongside BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) as one of Australia’s best miners in terms of ongoing iron profitability.

Foolish takeaway

So, are you too late to buy BC Iron? If you’re expecting 60% capital growth and 10% dividends again this year, then I would say yes. However a 7% dividend is not to be sneezed at and BC Iron’s low cash costs combined with a focus on mine expansion and debt repayment should see it safe through sustained falls in the iron price.

BC Iron has fallen 8% recently in sympathy with the price of iron ore, and I suspect there may be further to fall, which could provide some investors with a great buying opportunity. It’s worth noting that if the iron ore price does fall to $100 or below, BC Iron will suffer a drop in profits next year which will also put downwards pressure on its dividend. I’ve already sold half my BC Iron holdings in the face of this eventuality, but I’m keeping the other half.

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

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