One of the biggest investing success stories over the last few months has been the unlikely rise of iron ore. After dropping off somewhat during March and April, the iron ore price has been on a tear since – seemingly defying gravity and reaching new highs every few weeks. Just this week alone, iron ore has careened past US$115 a tonne to around US$117 at the time of writing.
As you might expect, this has been great news for the companies that dig up iron ore from the ground and sell it.
The ASX's biggest miner BHP Group Ltd (ASX: BHP) is up almost 60% since 16 March. Rio Tinto Limited (ASX: RIO) hasn't disappointed with a 33% rise over the same period. And Fortescue Metals Group Limited (ASX: FMG) has exploded to new all-time highs after rising more than 90% – undoubtedly making its founder (and significant shareholder) Andrew Forrest a very happy man.
So what's next for iron ore miners?
Well, one brokering firm remains very bullish on iron's future prospects. That broker is the US-based JPMorgan.
According to reporting in the Australian Financial Review (AFR), JPMorgan believes the major iron ore miners are still offering compelling returns for shareholders, even at the current pricing. This stems from the firm increasing its iron ore pricing forecasts for 2021 and 2022 by 19% and 10% respectively. It builds this thesis on the assumption that Brazilian mining giant Vale won't be able to increase its iron ore production above the current level of 1 million tonnes per day over the next 12 months.
Vale was forced to shut its production facilities in the face of the coronavirus crises in Brazil and has only reopened production recently.
The AFR quotes JPMorgan analyst Lyndon Fagan, who stated:
"The Vale recovery was previously seen as a catalyst to see iron ore prices trade lower. However, with the production now back in the market, and iron ore continuing to rally, we struggle to see what releases the pricing tension. We are now starting to think prices could remain well above cost curve support levels until Simandou [a new mine in Guinea] comes to market, which could be five to seven years away."
In the meantime, JPMorgan is tipping BHP and Rio as the best bets for iron ore right now, saying these two companies haven't realised their upside the way Fortescue has:
"At current trading levels we see compelling valuation support, 5 to 6 per cent dividend yield, and material consensus EPS upgrades to come through"
JPMorgan has a $43 price target for BHP and a $120 target for Rio. It remains neutral on Fortescue with an $18.60 target.
