Iron ore miners have had it tough the last few years.
In Jan 2019, there was one of the biggest disasters in Brazil, the world’s second largest producing country. Vale VALE, one of the country’s leading iron ore producers, had one of its tailings dams breaking down, causing great damage to life and property.
Come 2020, there were pandemic-induced shutdowns the world over, which significantly impacted demand, as factories, governments and businesses came to a screeching halt. Brazil again had a big problem, by virtue of too many mine workers contracting the disease. And last week, Vale’s Itabira mine was finally shut down by court order.
Iron ore’s main use is in the production of steel. So it stands to reason that demand for the things that use steel has a direct impact on iron ore.
The main consumers of steel are infrastructure, automobiles and machinery. Since these are things that typically see rising demand in a growing economy, economic recovery is essential for sustainable growth. On the other hand, governments all over the world are working on strategies to boost employment and bring the economy back on track. So large, heavy infrastructure builds are a no-brainer at this point.
China is already considering infrastructure initiatives, which is the reason the world’s largest steel producer continues to buy iron ore. China’s demand for steel will gather momentum in the second half of 2020, according to the World Steel Association’s (WSA) Short Range Outlook (SRO), as these plans are acted upon.
While the auto sector has been dealt a heavy blow by the work from home paradigm, the WSA expects a positive impact from people trying to avoid public transport. EVs, which continue to enjoy government support, will also likely drive demand.
Make no mistake: Overall demand for steel is currently expected to be down 6.4% this year, so the 3.8% gain expected in 2021 won’t make good all the losses. However, demand out of China will allow iron ore producers to post gains this year. That’s what makes these three stocks worth buying-
BHP Group Limited BHP
Melbourne, Australia’s BHP Group is one of the world’s largest diversified resource companies with large, long-life, low-cost and expandable assets across several continents. The company operates under a Dual Listed Company structure with two parent companies (BHP Group Limited and BHP Group Plc). It operates as single economic entity, sharing the same board and management team. Operations are well diversified in terms of commodity, geography and market.
Zacks Rank #1
Value A
Growth B
Momentum A
VGM A
Industry: Mining – Miscellaneous Top 12% (30 out of 252)
2020 (ending June) EPS estimate up 14 cents (4.0%)
2021 EPS estimate up 35 cents (12.3%)
Valuation: On EV-to-forward 12 months EBITDA basis, the shares are trading at 2.8X, the low end of the range over the past year.
Rio Tinto PLC RIO
Rio Tinto PLC has mining operations in New Zealand, Australia, South Africa, Europe and Canada. Its mining interests are in aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, dioxide feedstock, diamonds, talc and zircon.
Zacks Rank #1
Value A
Growth B
Momentum A
VGM A
Industry: Mining – Miscellaneous Top 12% (30 out of 252)
2020 EPS estimate up 89 cents (19.8%)
2021 EPS estimate up 70 cents (16.7%)
Valuation: On EV-to-forward 12 months EBITDA basis, the shares are trading at 3.4X, below their median value over the past year.
Fortescue Metals Group Ltd. FSUGY
Fortescue Metals Group Ltd is engaged in the exploration and mining of iron ore properties. Its properties primarily include the Cloudbreak and Christmas Creek mine sites and the Solomon project located in Pilbara, Western Australia. Fortescue Metals Group Ltd is based in East Perth, Australia.
Zacks Rank #1
Value B
Growth A
Momentum A
VGM A
Industry: Mining – Iron Top 1% (2 out of 252)
2020 (ending June) EPS estimate up 16 cents (5.8%)
2021 EPS estimate up 60 cents (33.3%)
Valuation: On EV-to-forward 12 months EBITDA basis, the shares are trading at 3.5X, slightly above their median value over the past year.
Price Performance Over the Past Year
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