Iron ore price collapse: Is it time to sell your miners?

While energy investors are celebrating a surge in oil prices overnight, investors in another core commodity market are likely second-guessing their investment theses.

While iron ore topped US$80 a tonne for the first time in more than two years on Tuesday, the commodity has since slipped almost 11%. It fell 6.8% overnight to just US$72.08 a tonne, according to data from The Metal Bulletin, in what is the latest sign the recent rally is unsustainable.

In fact, according to The ABC, one analyst believes the current iron ore price could fall just as sharply as it has risen so far this year. In what will come a as a concern for investors in the space, analyst Peter Strachan said:

“I thought we were in a bubble $10 or $15 a tonne lower than we currently are so I’ve been wrong for the last $15 of rise.”

He believes the commodity is headed for a sharp fall in the first quarter of the 2017 calendar year, ” and how far (it will) go, I would think mid (US$40s), mid to high (US$40s) a tonne.”

Strachan’s comments were similar to those made by Nev Power, CEO of one of the country’s biggest mining powers in Fortescue Metals Group Limited (ASX: FMG). He was recently quoted by The Australian Financial Review as saying he thinks the commodity will quickly return to “oscillating between $US$40 and $US60 a tonne”.

A fall to US$60 a tonne would certainly weigh on the share prices of miners in the sector, while a decline to US$40 a tonne – which is more than 44% below today’s level – would likely be devastating for investors in the sector.

That includes shareholders of companies such as BC Iron Limited (ASX: BCI), as well as major companies like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Of course, companies across the sector have been focused on reducing costs throughout their businesses, which will help them weather the storm, but it won’t make them immune.

Foolish takeaway

The resilient iron ore price has come as a surprise to many investors over the past 10 or so months. While some want to believe the good times can continue, it’s also fair to argue that there hasn’t been a permanent change in fundamentals supporting the rally. The commodity’s price could fluctuate in the short-term, but investors who are exposed to the sector ought to reassess their positions to determine whether they are still comfortable holding them.

Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

Discover out the name of this blue chip share along with 2 others in our new FREE report "The Motley Fool's Top 3 Blue Chips Stocks For 2017."

Click here to receive your copy.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.