Something very big is happening in the world of mining right now. And this shake-up has dragged down UK mining stocks, possibly pushing some already-cheap shares into bargain territory. The big news is that the price of iron ore has collapsed in recent months. In May, the price of the steel-making ingredient hit a record $233 a tonne. On Monday, it collapsed to $94 a tonne and currently hovers around $107. In other words, the price has crashed by more than half (-54.1%) in just four months. Here are two cheap shares that I don’t own, but I would buy today after their recent steep falls.
Cheap shares: 1. BHP Group
As a veteran value investor always hunting for cheap shares, I have BHP Group (LSE: BHP) firmly on my radar. At the current share price of 1,883.8p, the Anglo-Australian mining group is valued at £98.7bn. This makes it one of the FTSE 100 index’s super-heavyweights. But this low-priced stock just keeps getting cheaper as summer turns to autumn. Just six weeks ago, the BHP share price hit a 52-week intra-day high of 2,505p on 17 August. Today, the shares are over 620p cheaper, a collapse of almost a quarter (-24.8%). However, part of this fall came after BHP paid a huge cash dividend to shareholders.
After this price crash, I see BHP’s cheap shares as offering compelling value for an income-seeker like me. The stock now trades on a rating of 11.3 times earnings and offers an earnings yield of 8.8%. The dividend yield is 11.5% a year, more than three times the Footsie’s forecast yield of 3.8% for 2021. However, like my Foolish friend Roland Head, I don’t see this huge dividend yield as sustainable into 2022–24. Even so, for me, BHP offers cheap exposure to future economic recovery. Hence, I’d happily buy and hold this stock today.
Dividend stock: 2. Rio Tinto
The second of my cheap shares is another Anglo-Australian mega-miner: Rio Tinto (LSE: RIO) — ‘red river’ in Spanish. Like bigger rival BHP, Rio has seen its shares slump since peaking in early May. As I write, Rio stock hovers around 4,919p, down almost 1,870p from its 52-week high of 6,788p. Thus, the shares have dived by more than a quarter (-27.5%) in 4.5 months. But again, like BHP, part of this price fall can be ascribed to two huge dividends paid to shareholders on 23 September.
After their recent plunge, I see value in these cheap shares. The £81.7bn miner’s stock now trades on a lowly price-to-earnings ratio of 5.7 and an earnings yield of 17.5%. The shares also offer a market-beating dividend yield of 10.2% a year. Alas, I suspect this bumper dividend, like BHP’s, cannot last. Indeed, it may well be cut unless the price of iron ore rises steeply from current levels.
Now for the bad news: one reason for the plunging price of iron ore is global growth engine China. Beijing recently cut steel production to try to slow new construction projects. This is linked to the near-collapse of giant Chinese property developer China Evergrande. If this company’s crisis infects China’s wider property market, then this could be awful news for mining stocks. Hence, I’d expect these two shares to have a volatile and bumpy ride in 2021–22!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.