Buying opportunities await in iron oreThe heavy decline in...

Buying opportunities await in iron ore

The heavy decline in prices doesn’t mean the run is over, with a window likely for increasing exposure at the right price.

fb6ee26885059de7bf906e96306479d61e2782a4.webp

While the falls may have been disappointing for investors in BHP, Rio Tinto and others, anyone who bought in more than 12 months ago is almost certainly still ahead, even without the bumper dividends most have unleashed in the past year. Simon Letch

William McInnesReporter

Sep 24, 2021 – 5.00am

After a decline of more than 50 per cent in the price of iron ore in the past four months, many investors will be wondering if the investment case for local miners remains intact.

While the heavy fall in the price will no doubt be painful for any investors who bought into iron ore miners in May when prices were at a record high, it doesn’t necessarily mean they should be giving up and dumping their holdings.

1411276ce13d59708ae0e84f3fb2eb0feae38bca.webp

Now is not the time for investors to be dumping their holdings in iron ore miners. Krystle Wright

The price fall has been as aggressive as it has been surprising. But many fund managers and analysts are confident the worst is close to being over and that the falls may present an opportunity to buy up the iron ore miners.

“I wouldn’t get caught up in the huge fluctuations,” Fidelity portfolio manager Paul Taylor says. “The long-term assumptions are more important and we’ve got the biggest low-cost producers in the world.

“It got up to well over $US200 a tonne, but the iron ore miners were never thinking that was the permanent price. Most players would have assumed a long-term iron ore price of $US50-70 a tonne.”

While the falls may have been disappointing for investors in BHP, Rio Tinto and others, anyone who bought in more than 12 months ago is almost certainly still ahead, even without the bumper dividends most have unleashed in the past year.

“If we’re pulling iron ore out of the ground at $US20 a tonne and selling it at even $US60, you’re still making a big margin,” Taylor says.

Both BHP and Rio also offer good exposure to several base metals still soaring amid the push towards electrification.

BHP in particular has a strong exposure to copper, with more than a quarter of its revenue coming from the base metal.

In fact, SG Hiscock’s Australian equities fund has ditched its position in Rio and switched to BHP because of its exposure to commodities such as copper, potash and nickel.

Rio derives less than 20 per cent of its underlying earnings from aluminium, copper and other minerals combined, with the vast majority coming from iron ore.

Fortescue Metals Group’s fall has been sharper than either BHP’s or Rio’s as it doesn’t have exposure to any other commodities. But investors who bought before July 2020 should still be in the black even without the dividend of $3.58 a share in the past 12 months.

Brokers bullish

Macquarie is bullish on all local iron ore producers it covers, with “outperform” ratings on BHP, Rio, Fortescue, Mineral Resources, Champion Iron, Deterra Royalties and Mount Gibson Iron.

“We remain positive on stocks with iron ore exposure,” Macquarie analyst Hayden Bairstow says. “BHP is our preferred large cap exposure and we remain positive on both Rio and Fortescue.”

The broker says its optimism is based on predictions the price will rebound in 2022.

“Despite the recent drop in iron ore prices, we note port iron ore prices (which are at $US20 a tonne premium to index prices) remained resilient,” Bairstow says.

“If Chinese housing new starts rebound in 2022 and the power shortages ease in China, the demand uptick could drive a rebound in iron ore prices, particularly given ongoing global supply hurdles.”

In a note to clients on Wednesday, Citi upgraded its rating on Champion Iron to “buy” from “neutral”, saying the pressure from the iron ore price fall had created a strong value opportunity.

“While we acknowledge significant near-term risk to iron ore price forecasts, 2022 and 2023 iron ore at $US125 and $US80 per tonne [respectively] provides a much greater level of confidence for earnings forecasts, particularly as China lead indicators stabilise,” Citi analyst Paul McTaggart says.

“Further, longer-dated market concerns [regarding] large-scale iron ore exports from Guinea look much less certain. Iron ore may hold [above] $US100 levels for longer than the market expects.”

8ee0946aa8f0a45e089bdcc4f39980fde0da64d4.webp

RELATED

Spiralling iron ore miners drag ASX to 2.1pc loss

The broker did cut its price target on the stock from $7.25 to $6.40, although that is still roughly 50 per cent higher than its current share price.

Citi is forecasting the iron ore price will stay above $US100 a tonne until 2024 and also suggests the indicators from China that had caused part of the slide are turning.

“China lead indicators are stabilising and have turned up off recent lows,” McTaggart says. “The fact steel prices have stayed high points to apparent consumption being driven more by state-imposed production cuts than weakness in underlying demand.”