Iron Ore prices surge into Chinese New Year

James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I am very excited about the prospects for iron ore miners. Iron ore prices in China beat expectations, hitting $153/metric ton on Jan. 31, 2013, and continued to move up to $155.10/metric ton by Feb. 8. March contracts had also risen to $157.75/metric ton on the same day. Prices were surging as smaller steel mills continue to restock ahead of Chinese New Year celebrations. A Singapore iron ore trader was quoted as saying they are buying in anticipation of greater demand for steel after the New Year. Chinese iron miners had a low output as a result of a very harsh winter and most iron ore stocks at steel mills were low heading into the Chinese New Year, necessitating buying on the world market. Now it is all quiet on the iron trading front

Chinese New Year celebrations have begun in earnest, and there is a bit of anticipation for earnings reports from the four largest iron ore mining stocks. The Q2, Q4, or full year reports for these stocks come out as follows: Vale (NYSE: VALE) delivers its Q4 report on Feb. 27, Rio Tinto (NYSE: RIO) announces full year earnings on Feb. 14, BHP (NYSE: BHP) reports full year earnings on Feb. 20, and Fortescue Metals Group (ASX: FMG) delivers its Q2 report on Feb. 20 as well. These reports probably will not be spectacular, but may hold some surprises. Last October iron ore prices hit an extended bottom at $87/metric ton. What we want to see is the higher iron prices and shipping rates of late November and all of December putting some nice profits back on the table. There should be upward movement in all four stocks after the reports. One of the big questions is whether or not the high iron prices will be sustained through the spring. Estimates of average iron ore prices for the full year have been moving up from $110/metric ton a month ago to as high as $130/metric ton a week ago. Just this week we had an estimate of average prices of $140/metric ton. This means big profits for the producers.

Iron ore is the cash cow for these big miners, but the largest three (Vale, Rio, and BHP) dilute their iron earnings with global operations, though they are much better able to survive low iron prices. These three are like mutual funds or exchange traded funds unto themselves. They have global operations with so many minerals and metals that I could write a whole article about each of them. 

Vale has slipped in price quite a bit over the last few years. They have been beaten down by the semi-socialist government of Brazil, but they are the darling of the nation. There is hope and they seem to be on a roll. The stock seems under-priced. They just received a government contract for a major National rail concession in Brazil in preparation for the 2014 World Cup and 2016 Olympics. They are also building rail lines in Mozambique and have mineral concessions in 38 countries. As for iron ore production, they are set to produce 500 million tons in Brazil this year, and with high iron prices we are talking billions of dollars in profit. 

Rio Tinto is all over the planet and has made some big mistakes recently. The CEO just stepped down with the $14 billion writedown of the failed $38 billion 2007 buyout of Alcan and the failed a coal mine in Mozambique of late. In the scheme of things the writedowns are minor. That said, they have a very cheap stock price and stand to profit from their 250 million tons a year of iron ore production in the Pilbara in Western Australia. 

BHP, like Rio, is big and all over the planet digging up and selling minerals, metals and diamonds. They have the highest market cap of all of the big four, which may not be justified, as they seem over-priced for the sector. I am less excited about the prospects of this company. They look like they are running scared. BHP has put development plans on hold when the going got rough, shelving $50 billion in development projects in the last year. They have been pulling in their resources like the world is going to end next month. On the other hand, they are on track to raise their iron ore production in Pilbara from 180 million tons a year to 220 million this year, and we should see a good rise in iron ore profits here.

Fortescue is the only pure iron play and is set to scoop up the profit from what looks to be an extended top in iron ore pricing. Fortescue is on track for their huge expansion projects expected to come to full fruition. In January they announced hitting the 100 megaton run rate and are set to hit their ultimate goal of 155 megaton run rate in December of this year.

The earnings reports this spring, as well as in April and May, should give a bounce to all of the big four iron miners. The greatest rise in stock price will hit Fortescue Metals. They grossed $6.63 billion in fiscal year June 2012 with a 23% profit margin. At their current run rate and at these iron prices they should be grossing $1.2 to $1.3 billion a month. The profitability should be amazing. Financing is in place to finish infrastructure for hitting their goals by year end. I believe Fortescue is perfectly positioned to take advantage of these high iron prices.

 

 


jamesacoffman owns shares of Companhia Vale Ads. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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