On Wednesday, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rallied 0.6% despite a weak lead from Wall Street as investors pondered the timing of the Federal Reserve's decision to raise rates. Iron ore stocks joined the market rally too – thanks to a rebounding iron ore price – and despite the shock decision of Atlas Iron Limited (ASX: AGO) to enter a trading halt pending a strategic review.
At the close of trade yesterday:
- Fortescue Metals Group Limited (ASX: FMG) had soared 8.1% to $1.94
- Rio Tinto Limited (ASX: RIO) jumped 1.5% to $57
- BHP Billiton Limited (ASX: BHP) gained 0.95% to $30.74
The iron ore price remains at a ten-year low below US$50 a tonne, which has flattened the high-cost producers and it won't be surprising to see more troubles beset the sector and the likes of Atlas Iron.
For the lowest cost producers however, it could be a different story…
Some of the majors remain profitable at current spot iron ore prices – much less profitable of course than they were when the price per tonne was north of US$100 – but profitable non-the-less.
While predicting the price of any commodity is near impossible the current mayhem could offer savvy long-term investors the opportunity to selectively buy industry-leading giants such as BHP and RIO at attractive prices.
Fortescue meanwhile needs to be treated with care. Although its mine operations may be profitable at current levels, that doesn't mean its business is. With a heavily indebted balance sheet, investors need to 'dig deep' into the finances of this miner and establish if the company can cover its interest repayments.
The $64,000 question for investors actually is not whether the iron ore price has hit rock bottom, but rather whether the market's panic and sell-off of companies exposed to the iron ore price has led to attractive investment opportunities. Given the strong balance sheets and diversified asset base exposure of BHP and RIO, these would appear to be two stocks worth monitoring.
