News: BHP COLUMN-China's iron ore strength cancelled out by world weakness: Russell, page-5

You’ve bought shares in these companies and not bothered to look at what they ship every year? Seriously!!???

RIO #1, BHP #2 and FMG #3.

Just remember FMG ships an inferior and much lower grade/higher impurity product. This is why FMG trades at a discount to headline earnings. When the iron ore market turns that discount increases significantly, it’s been over 30% in the past. I’d suggest researching previous issues on this. This is why FMG was $3.70-$4 for a long time despite a strong iron ore price. They even sought to blend their low grade ore because the discount was killing margins. Rumours were even rejected and having to accept 40% discounts. It’s not the opposite thanks to a dam disaster again in Brazil and now COVID knocking out serious tonnage. So FMGs poor product is now accepted with no issues. Note again, Brazil’s product is superior to anything we have in Australia, just higher freight to deliver. RIOs and BHPs high grade is good, but FMG doesn’t have this.

The billion dollar question is this:

Will iron ore demand and price stay elevated above $US80? If so FMG is alright. If not, FMG will go down the elevator again. This is exactly why FMG needs a material acquisition while its share price and cash flow is high, specifically outside iron ore.

BHP is diversified and has tier 1 copper deposits that FMG will never get the privilege of owning. Not to mention $10s of billions of what I call off balance sheet tenement holdings. Only Rio and BHP have this hence. As well as coke, thermal, O&G. I acknowledge FMG has been one of the stellar performers of large cap stocks, but it comes with high risk. I’m happy with BHP which has generally outperformed the index since 2016. Note I am a wealth preservation/compound investor, so index based returns are fine.