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Do the iron ore miners offer long-term value?

Regular readers may recall I flagged the upcoming fall in iron ore prices in December last year, owing to the perfect storm of increasing global supply and slowing growth in demand.

The world’s three biggest iron ore producers – Vale Inc. SA (NYSE: VALE), BHP and Rio have all begun massive production expansions designed to deliver upwards of 35% more ore by 2018. Australian junior miners have jumped on the bandwagon, and with a number of new iron ore projects coming online worldwide, the stage was set for the current price collapse.

Junior iron ore miners enjoyed a meteoric rise in the first half of FY2014, matched only by their equally dramatic plunge from the heavens in the second half. Let’s look at some numbers:

BC Iron Limited (ASX: BCI)down 40% in 6 months, and down 7.5% for the year

Atlas Iron Limited (ASX: AGO)down 50% in 6 months, and down 22% for the year

Mount Gibson Iron Limited (ASX: MGX)down 32% in 6 months, and up 46% for the year

Fortescue Metals Group Limited (ASX: FMG)down 30% in 6 months, and up 18% for the year

Rio Tinto Limited (ASX: RIO)down 12% in 6 months, and up 6% for the year

BHP Billiton Limited (ASX: BHP) – down 1.2% in 6 months, up 7.5% for the year

BHP is the clear winner thanks to its diversification, although Rio Tinto also escaped largely unscathed thanks to its size and low-cost ore deposits. The junior miners however bought the full roller coaster ride of bumper prices and awesome dividends before coming down hard.

With iron ore prices at their lowest point in 22 months, iron ore miners could still fall further once shareholders realise how much damage has been done to their revenue stream. Shrewd investors may want to wait for the bottom before buying the best producers on the cheap, but for now I would counsel you to wait.

Most of these iron ore expansions won’t be fully completed for years yet, which means that if global demand continues to slow there could potentially be a real glut in future years rather than the price shock we’re seeing now. The current price falls appear to be largely anticipatory with no major changes to global supply as yet, and I would recommend investors steer clear of iron ore for at least twelve months until the air clears and we can see what’s what.

There is a hidden silver lining however, for those who bought iron ore shares to hold for the long run. If you owned your shares for a year or more, you’ll notice that four of the six shares above are still up over the last twelve months. In the long term commodity shares tend to even out and with a ten-year timeframe in mind, prices on iron ore miners are starting to look pretty good.

Every commodity investor must read this!

The Motley Fool favours just such a buy and hold approach, although we also prefer our commodities to be rarer, with a less cyclical nature and greater potential for profits. They don’t call it black gold for nothing; with limited supply and growing demand, Oil suffers less from the price fluctuations that frustrate iron and gold investors.

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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