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Iron ore jumps 7% overnight: Is Fortescue Metals Group Limited a bargain?

Iron Ore Mining Operations

Iron ore miners are looking pretty good after the spot value of iron ore jumped 7% to US$66.22 per tonne overnight, according to Business Insider. The share price of miners BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG) rose on the news.

Smaller miners such as Mount Gibson Iron Limited (ASX: MGX) and Atlas Iron Limited (ASX: AGO) rose more sharply, up 3% and 5% respectively.

Iron ore reportedly rose on the news that measures of Chinese construction activity rose to their highest level since December 2013, in signs that government stimulus may be having an effect. China is by far the largest end customer for iron ore in the world.

Some of our mining companies, especially BHP and Fortescue, may be cheap if the recent surge in commodity prices is sustained. Fortescue Metals in particular is generating oodles of cash at current prices, although it’s also important to note that the Australian dollar has strengthened in recent times, reducing some of the benefits.

The cyclicality of the iron ore industry is also a necessary concern, especially if one took the view that Chinese demand was going to slow down. For that reason I’m not a buyer of any of the big miners today.

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Motley Fool contributor Sean O'Neill 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.

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