Iron ore has been on fire so far this year, surging 70% to above $150 per ton — levels last seen in 2013. This uptrend has been primarily fueled by strong demand from China that has initiated a massive infrastructure stimulus to recover from the pandemic-induced slump. This combined with supply shortage concerns from Brazil, which has been hit hard by the COVID-19 pandemic, drove the rally in iron ore prices — making it the best-performing major commodity this year.
China Orchestrating the Show
China’s steel production gained steam spurred by lift in infrastructure spending and renewed vigor in manufacturing activity. Per the latest data from the
World Steel Association
, global steel production was down 2% year over year to 1,511 million ton (Mt) between January and October 2020 time period, while steel production in China went up 5.5% to 829 Mt. The country’s steel demand is expected to increase by 8% for the full year. Meanwhile China’s iron ore imports increased 11% to 1.07 billion tons in the first 11 months of 2020, beating full year imports of 1.06 billion tons in 2019.
Also, the Official NBS Manufacturing PMI in China was 52.1 in November 2020 — sustaining the streak of nine consecutive months of increase in factory activity and also the highest in three years. This is a major recovery from the all-time low PMI reading of 35.7 in February due to the coronavirus crisis-induced lockdown.
Meanwhile the worsening coronavirus situation in Brazil stoked fears of an impending supply crunch for iron ore. It is worth mentioning that Brazilian miner,
Vale S.A
’s
VALE
lowering of iron ore production guidance for 2020 to a range of 300 to 305 million tons (Mt) citing supply disruptions only aggravated the fears and lifted iron ore prices. Cyclone threats in Port Hedland also led to concerns of short term disruptions from Australia, boosting iron ore prices further.
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In tandem with the rising iron-ore price, the Zacks Mining – Iron industry has gained 28.3% so far this year, outperforming the S&P 500 and the
Basic Materials
Sector’s rally of 14.9% and 17.1%, respectively.
The group’s
Zacks Industry Rank
, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining – Iron Industry currently carries a Zacks Industry Rank #8, which places it at the top 3% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
4 Mining Stocks to Watch Out For
As the old saying goes “Strike while the iron is hot,” we suggest you to keep an eye on these stocks that are poised well to benefit from the rally in iron ore prices. We have handpicked four such stocks that have a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a
VGM Score
of A or B. Our research shows that stocks with such a combination offer the best investment opportunities.
You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Year-to-date, these stocks have outperformed the S&P 500 and the Basic Material Sector’s growth of 14.9% and 17%, respectively. This is shown in the chart below.
Fortescue Metals Group Ltd
FSUGY
: Headquartered in East Perth, Australia, Fortescue Metals engages in exploration, development, production, processing, and sale of iron ore in Australia, China, and internationally.
The company has generated an average EBITDA margin of 50% over the last decade and an average return on capital employed of 23% — reflecting outstanding profitability and capital efficiency. Focus on innovation and productivity improvements has made it an industry leader in autonomy and continues to drive sustained low cost performance. Its sound balance sheet provides the company with the flexibility to support ongoing operations and the capacity to fund future growth.
The Zacks Consensus Estimate for the company’s current fiscal year’s earnings has been revised upward by 12% over the past 30 days. The figure currently indicates year-over-year improvement of 54%. Its currently has a Zacks Rank #1 and a VGM Score of A. The stock has soared 131.3% year-to-date.
BHP Group
BHP
: Headquartered in Melbourne, Australia, BHP Group engages in exploration, development, and production of oil and gas properties; and mining of copper, silver, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and energy coal.
Efforts to make operations more efficient through smarter technology adoption across the entire value chain will continue to aid in reducing costs, thereby boosting the company’s margins. Its focus on lowering debt will also contribute to growth. BHP Group plans to simplify its coal portfolio and concentrate on higher quality coking coals to capitalize on demand from steelmakers. The company has six major projects under development in petroleum, copper, iron ore and potash, which will drive growth in the long run.
The company has a long-term estimated earnings growth rate of 4%. The Zacks Consensus Estimate for the company’s ongoing fiscal 2021 earnings suggests year-over-year growth of 38.3%. The estimate has been revised upward by 8% over the past 30 days. The stock, which has a Zacks Rank #1 and VGM Score of B, has appreciated 21% year-to-date.
Vale:
Rio de Janeiro, Brazil based- Vale produces and sells iron ore and iron ore pellets for use as raw materials in steelmaking in Brazil and internationally.
The company strives to sustain margins by focusing on product line, improving productivity and cutting costs. Backed by solid cash flow, Vale continues to lower debt position and strengthen balance sheet. Continued investment in growth projects, efforts to ramp up its coal business and transforming base metals business will also favor growth.
The company has a long-term estimated earnings growth rate of 25.1%. The Zacks Consensus Estimate for fiscal 2020 earnings suggests year-over-year growth of 9%. The estimate has moved north by 3% over the past 30 days. The company has a trailing four-quarter earnings surprise of 5.1%, on average. It currently has a Zacks Rank #3 and a VGM Score of A. year-to-date, the stock has surged 30.5%.
Rio Tinto plc
RIO
: Headquartered in London, the U.K., Rio Tinto engages in mining of aluminum, silver, molybdenum, copper, diamonds, gold, borates, titanium dioxide, salt, iron ore, and uranium.
The company boasts a world-class portfolio of high-quality assets and continues to strengthen it by increasing investment in high-value growth projects to ensure long-term growth. It also remains committed to making its portfolio as efficient as possible, through the use of technology and innovation, including automation. A strong balance sheet and a disciplined capital allocation strengthens its ability to sustain production, continue to invest in the business, while delivering superior returns to shareholders.
The Zacks Consensus Estimate for fiscal 2020 earnings indicates year-over-year improvement of 17%. The estimate has been revised upward by 3% over the past 30 days. The Zacks Ranked #3 stock with a VGM Score of A has gained 29% year-to-date.
Zacks Top 10 Stocks for 2021
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