It’s been a grim week for iron ore: on Wednesday, the price of iron ore hit a new low of $70, leaving it 48% lower than at the start of the year.
Prices seem unlikely to bounce back quickly, either — a new report from Goldman Sachs claims that the iron ore market needs to absorb a surplus of around 110 million tonnes next year.
Against this backdrop, are iron ore miners BHP Billiton (LSE: BLT) (NYSE: BBL.US), Rio Tinto (LSE: RIO) (NYSE: RIO.US) and Anglo American (LSE: AAL) still attractive? All three remain profitable at today’s prices, and have been open about their aim of maintaining market share while driving high-cost competitors out of business.
Keep buying
Iron ore may keep falling, but each of these companies is competing to capture long-term market share, and while Chinese growth may be slowing, I don’t think it’s likely to stop in the foreseeable future.
I believe all three firms remain attractive, but they’re all different — so which should you buy?
Rio Tinto: Rio remains the purest play on iron ore. Around 80% of the firm’s underlying profits come from iron ore, so earnings are directly linked to iron ore prices.
Rio’s prospective yield of 4.6% is unlikely to be threatened by this year’s price decline, although dividend growth may slow if prices don’t pick up next year.
BHP Billiton: For investors who don’t own oil shares, BHP is ideal: iron ore, oil and gas accounted for 76% of operating profit last year, with copper providing a further 22%, providing diverse exposure to four of the world’s key commodities.
BHP shares offer a 5% prospective yield, and the firm’s chief executive, Andrew Mackenzie, recently told Reuters that the firm’s dividend remains “well covered” at current iron ore prices.
Anglo American: Anglo is rather different: just 42% of its underlying operating profit came from iron ore during the first half of this year. Copper and diamonds each accounted for a further 25%, highlighting Anglo’s exposure to the luxury goods market.
Anglo shares currently trade below book value and offer a 4.2% prospective yield, making them an interesting value alternative to Rio and BHP.
Today’s top buy?
Anglo looks cheap in terms of book value, but that’s because earnings have been weaker than at BHP or Rio.
In my view, Anglo could be an attractive recovery buy, but BHP and Rio remain the top picks for income seekers.
