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Mining stocks plunge! Is it time to buy these 6 cheap companies?

Commodity prices have plunged over the last six months, led by a 20% fall in the spot iron ore price. The fall has seen an even greater drop in the share price of most of Australia’s small and mid-sized mining stocks, which begs the question.

Are iron ore companies now cheap?

Some investors avoid mining companies at all costs as they essentially have no control over the sale price of their product, yet others like the sector due to the relative lack of complexity. Mining is a relatively simple supply and demand game where the lowest cost suppliers with the most manageable debt levels usually win the day.

As such, the best way to rank the quality of mining companies is to make estimates on the cost of production and their ability to handle debt repayments. Luckily, there are a number of investment groups and funds that calculate the production costs for us.

Here’s a list of six mining companies, how much their share price has fallen in the last six months, and their estimated cost to produce a tonne of iron ore:

  1. Fortescue Metals Group Limited (ASX: FMG), down 37%, $72 per tonne
  2. BC Iron Limited (ASX: BCI), down 69%, $70 per tonne
  3. Atlas Iron Limited (ASX: AGO), down 63%, $82 per tonne
  4. Mount Gibson Iron Limited (ASX: MGX), down 44%, $75 per tonne
  5. BHP Billiton Limited (ASX: BHP), down 11%, $45 per tonne
  6. Rio Tinto Limited (ASX: RIO), down 9%, $43 per tonne

High Cost=Trouble

Experts now expect the medium term iron ore price to normalise at around $90 following this (hopefully) brief plunge into the high $70s. As can be seen above, at the current price some mining companies are probably operating at a loss and have consequently seen the biggest falls.

High Debt=Trouble

The only reason Fortescue and Mt Gibson haven’t plunged 50% or more is likely due to investor confidence that they won’t default on their debts. Fortescue’s sizeable debt load is long-dated, while Mt Gibson actually has a significant cash hoard.

I have no doubt that Mt Gibson’s management team is currently assessing rival companies that could be opportunistic acquisitions.

The Best

Investors clearly have more confidence in BHP and Rio, and deservedly so. The two largest miners are still operating at healthy margins at the depressed iron ore price and are quickly reducing their debt loads.

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

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