4 reasons why these iron ore miners could be a huge bargain

Signs are picking up for a higher iron ore price

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With share prices down as much as 45% since the start of this year, now may be the perfect time to jump into the iron ore miners.

You probably think I’m mad by now, with the iron ore price trading around US$94 a tonne, and close to every analyst under the sun predicting similar or lower prices in future.

But at a recent conference, Brazil’s Vale, BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: BHP), and Fortescue Metals Group Limited (ASX: FMG), all predicted higher prices for the commodity in the second half of this year.

Here are four reasons why they might well be right…

  1. The price of September iron ore futures have reached their highest level since May 27 at CNY716, which equates to around US$115 a tonne, according to IG Markets.
  2. Between 20-30% of iron ore mines in China have closed down, according to the China Metallurgical Mining Enterprise Association. Most of China’s mines are estimated to be high cost, so as the iron ore price has fallen, they have become unprofitable. Credit Suisse estimates China’s production will fall 16% this year and drop again in 2015. That is likely to push up demand for imported ore.
  3. Much of China’s ore is low quality, meaning it has to undergo additional processing, whereas Brazilian and Australian ore is much higher grade. It also happens to be more environmentally friendly – a factor of high importance to smog-covered Chinese cities.
  4. Most Chinese steel mills are located on the coast – conveniently close to the ports where iron ore can be dropped off, and far away from most Chinese iron ore mines.

Of concern are the junior Australian miners with higher production costs, like Mount Gibson Iron Limited (ASX: MGX) and Atlas Iron Limited (ASX: AGO), with cash costs estimated at around US$84 per tonne and US$80 a tonne respectively.  Note: that’s not their all-in sustaining cost either.

Junior BC Iron Limited (ASX: BCI) is probably the pick of the smaller miners, while BHP is my pick of the majors – thanks to its diverse resource base.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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