3 bargain mining stocks for greedy investors

Warren Buffett famously said: “Be fearful when others are greedy and greedy when others are fearful”. When we look at the Australian market currently, the most fear surrounds the mining sector and so-called momentum stocks. Mining stocks, specifically those exposed to the falling coal and iron ore prices, have seen sharp falls recently on weakness in global commodity markets.

This could well represent a classic example of being fearful when others are greedy as weakness in commodity prices could well stabilise over the coming 12 months and result in some great capital gains for patient investors.

Obviously I cannot predict where the iron ore price will be in 6, 12 or 24 months time, but in the past the iron ore price has recovered fairly swiftly from sub-$100 plunges. Each time the price has plunged below the mentally significant $100 level has turned out to be an excellent entry point into high-quality and profitable mining companies.

Here are some of the riskier options out there if you’re looking for a long-term entry into the iron ore space and believe the iron ore price will recover over time:

Mount Gibson Iron Limited (ASX: MGX) is in the unique position of having a huge cash pile of over $300m and a market cap of around $850 million. The company has a number of relatively low-cost mines, but these mines are also short-life and some investors are getting nervous about how the company will spend free cashflow and its cash hoard. Acquisitions are looking likely in the short term and a good one will boost the share price.

Atlas Iron Limited (ASX: AGO) is in a very different position! The fourth-largest iron ore miner in Australia has long-life assets and a valuable port allocation but cash costs of mining are high and some believe the company is barely profitable at an iron ore price of $110 per tonne. This has resulted in a 30% fall in the share price over the last month, but it will be one of the first to recover if the iron ore price does.

The pick of the bunch, in my view, is Fortescue Metals Limited (ASX: FMG). Fortescue has a break-even cost of around $80 and investors are becoming more comfortable that it will be able to meet its debt repayment obligations going forward. It has a big forecast dividend yield of around 6% next year and will be a big winner if the iron ore price remains above $100 a tonne.

A less risky proposition is The Motley Fool's favourite income idea for 2014. Check it out 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 2014."

Motley Fool contributor Andrew Mudie own shares in FMG. You can find Andrew on Twitter @andrewmudie

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