There are some very juicy yields available right now in the mining sector, including double-digit ones. An example is iron ore producer Ferrexpo (LSE: FXPO). After the Ferrexpo share price slid 11% in a year, its current yield is a hefty 12.4%.
So, is this a high yielder I should add to my portfolio today – or a possible value trap?
Ferrexpo and business risk
Ferrexpo mines iron ore, which it sells in pellet form. Such pellets are in demand for industrial use worldwide. Indeed, Ferrexpo is the third-largest exporter of iron ore pellets on the planet.
Iron, like many metals with large-scale industrial applications, is a cyclical market. Right now, prices are high – which is good news for Ferrexpo’s revenues and profit margins. I also see reasons to be optimistic about pricing in the next few years. While economic contraction threatens demand in some markets, large users like China are expected to maintain a big appetite for iron ore pellets.
So far, so good. But I see a big risk with Ferrexpo’s business model. Not only it is it concentrated on iron alone, unlike more diversified mining groups such as Rio Tinto, it is also focussed on production from a single complex of mines. That concentration means that if something unexpected affects production in that area, it could hurt Ferrexpo’s revenues and profits badly.
On top of that, those mines are in Ukraine. So with political risks around Ukraine currently elevated, that could also be bad news for Ferrexpo. For example, foreign customers may seek to diversify their iron sources to limit their reliance on Ukrainian exports.
Double-digit yield
A high yield often signals elevated risk. So, although there are risks in owning Ferrexpo shares, I think to some extent those are already reflected in the company’s yield of over 12%.
I still would feel uncomfortable buying a company with such a high geographic concentration of production. The unusually high yield might make me think hard before deciding not to add Ferrexpo to my portfolio. However, I would still not buy the company. That is because I see another long-term risk that is not connected to its Ukrainian focus – iron ore pricing.
My next move on the Ferrexpo share price
While I think iron ore pricing could stay high for now, there is no guarantee it will. Sooner or later, if demand stays elevated, more production will probably come online and that could hurt pricing. That could be bad news for Ferrexpo’s profitability.
The company’s dividend has moved around with iron pricing. So, while it was 73c in 2020, the year before it was only 20c. That is a big movement, and a good reminder of what shifts in commodity prices can mean for the dividends of listed mining companies. When iron ore prices next fall, I expect the Ferrexpo dividend to follow. So I am looking beyond the immediate temptation of a current yield over 12% and will not be adding Ferrexpo to my portfolio.
