When it comes to investing in iron ore, most investors will immediately think of ASX 200 stocks such as BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO), or maybe even Fortescue Ltd (ASX: FMG).
But while they may be the most well-known players on the Australian share market, they are not necessarily the best options right now.
The best ASX 200 iron ore stock to buy now based on potential upside could actually be Champion Iron Ltd (ASX: CIA) according to analysts at Goldman Sachs.
In case you're not familiar with the name, Champion Iron is a Canadian iron ore miner that owns and operates the Bloom Lake Mining Complex. It is an open-pit operation with two concentrators that primarily source energy from renewable hydroelectric power.
What is the broker saying about this ASX 200 iron ore stock?
Goldman highlights that the miner has just released its quarterly update. And while that was softer than expected, the broker remains positive and is expecting a half-year result that is stronger than consensus estimates. It said:
CIA reported a weaker than expected March Q with concentrate production and sales of 3.3/3.0Mt, both -7% below GSe/Visible Alpha Consensus Data (see Exhibit 2) due to unplanned maintenance and reduced plant availability after CIA pushed & tested Bloom Lake beyond nameplate in the Dec Q. There was also further unplanned maintenance on the rail & port.
CIA will release FY24 results on Friday, May 31 at 11:00pm AEST. We forecast underlying EBITDA of C$541mn (vs. Visible Alpha Consensus Data of C$526mn; prior to the 4Q24 result) and net debt of C$171mn.
Big returns
Goldman is expecting big returns from this iron ore stock over the next 12 months.
In response to the update, the broker has reiterated its buy rating and $9.30 price target on its shares. This implies approximately 30% upside for investors from current levels.
In addition, the broker is forecasting dividend yields of 3.1% in FY 2024 and then 4.5% in FY 2025, boosting the 12-month total potential return beyond 33%.
Why is Goldman bullish?
The broker revealed that it is bullish on the ASX 200 iron ore stock due to its valuation and strong earnings and free cash flow outlook. It explains:
[T]he stock is trading at 0.8x NAV (A$8.8/sh) and ~4.4x EBITDA (NTM). Our NAV is based on a long run Fe price of ~US$105/t (real) for 65% Fe and ~US$75/t premium for DRPF above 62% Fe Index. For every ~US$10/t increase in our long run price, our CIA NAV would increase by ~A$1.5/sh.
CIA has now ramped-up Bloom Lake Phase II to 15Mtpa nameplate, and we expect this to support +50% EBITDA growth and doubling of Operating Cash Flow (OCF) in FY25, which could fund de-bottlenecking of Bloom Lake to 18Mtpa (not included in GSe base case).
