It's hard to cut through the noise when markets are this volatile. But the latest sell-off is an opportunity to buy ASX iron ore miners as their fundamentals are improving.
The same can't necessarily be said for other industries that is trying to overcome uncertainty from COVID-19, China-Australia tension, the US Presidential Election and sky-high valuations.
These anxieties triggered a 2.5% tumble on the S&P/ASX 200 Index (Index:^AXJO) during lunch time trade with every sector losing ground.
Thrown into the same hole
Our iron ore majors aren't spared either. The BHP Group Ltd (ASX: BHP) share price tumbled 2.3% to $36.56, Fortescue Metals Group Limited (ASX: FMG) share price lost 2.4% to $18.05 and Rio Tinto Limited (ASX: RIO) share price dipped 0.5% to $98.83.
The indiscriminate selling across the market is a good thing as it presents a buying opportunity for this group of ASX stocks.
The ASX stocks looking cheap… maybe
The fact is, our iron ore miners aren't overpriced. On a conservative outlook for the iron ore price, they represent fair value.
But if the current spot price of around US$120 a tonne is sustained over the medium-term, these stocks are looking dirt cheap!
The fundamentals for iron ore just improved as well. Shares in European automakers surged on Monday on a brighter than expected demand outlook for vehicles, noted Macquarie Group Ltd (ASX: MQG).
Outlook for iron ore improving
This is great news as it means demand for steel isn't only coming from China, although that's still the biggest driver for our mining majors.
The pick-up in the auto industry is also reassuring as infrastructure construction projects around the world take time to ramp up.
"Chinese steel demand has rebounded at a significantly faster pace than the rest of the world, which when combined with depressed iron ore supply in Brazil has resulted in strong iron ore prices," said Macquarie.
"We are now seeing increased steel-intensive demand recovery in the US, EU and Indian markets, which should further support steel inputs."
What's the upside for BHP and friends?
If the price of the steel making mineral were to hang around current levels through 2021, the three mining majors will generate an impressive 10% free cash flow yield.
They will also see large consensus earnings upgrades to their earnings before interest, tax, depreciation and amortisation (EBITDA) of around 35%, according to JPMorgan.
The upside for these ASX stocks from the spot commodity price is much more significant than it is for gold miners as the precious metal trades near record highs.
JPMorgan said that ASX gold miners under its coverage are trading at around 10% of consensus forecast if the current gold price of US$1,900 plus an ounce is used.
