Even though current news stories could be negative, working out which quality stock has a positive future ahead has historically been a sensible way to play stocks. Right now, many of our big end-of-town stocks in the top 20 look overpriced. When interest rates are poised to fall, I suspect a rotation out of many of these companies (such as CBA) will be good for stocks that benefit from low interest rates.
The standout stocks of the S&P/ASX20 that have been beaten up by the market now are companies such as BHP, Rio and Fortescue (FMG). One outside the top 20 that’s worth thinking about is Champion Iron (CIA).
Working against these companies is the slow boat to China for the economic recovery of the world’s second biggest economy, and our best customer for our iron ore exports. But if you’re prepared to bet on an eventual comeback for China (perhaps over 2025) and given the market’s history of buying stocks ahead of the improved profit conditions that are likely to happen, then considering our big iron ore stocks makes sense.
Of course, if you’re not a patient player, this insight and investment play won’t be for you.
Part of the reason why our miners have seen a big slide (BHP is down by over 20 year-to-date) is China’s weakness and its housing oversupply that has driven house prices down. This has affected the wealth attitudes of China’s nation of big shoppers. Until all this changes, iron ore prices could be under pressure.
Let’s talk more about The Big Australian
BHP now sells to other countries in South-East Asia. And India is becoming a bigger customer. In addition, the company’s going long copper was a masterstroke. All up, taking the view that its share price has upside, looks like a smart bet. Here’s the view of Morgan Stanley’s analysts reported by FNArena: “While risks remain around Chinese growth, Morgan Stanley notes resource stocks have already corrected and sees potential gains heading into peak season. The iron ore price will stabilise and show some upside (suggests the broker), while copper pricing will likely benefit from the return of price-elastic demand. Metallurgical coal is trading close to cost support, with India and China entering a stronger steel production period. The analysts raise the target for BHP Group to $47.50 from $46.30 and upgrade to Overweight from Equal-weight as company-specific growth and capex risks are now more fully appreciated”.
Morgans is a big fan of BHP’s copper investment: “Morgans views BHP as offering a compelling earnings platform, improving organic growth options and an attractive dividend profile. Investor concerns around China/global growth are the key source of recent selling pressure, and likely to moderate in time.”
Consensus rise for BHP is 12.7% to $45.46, while its current price is $40.34.
Let’s now go to RIO!
Meanwhile, Rio also has a consensus rise of 12.7% to $127.41 and is now priced by the market at $113.02.
RIO
Fortescue (FMG): L’Enfant terrible!
Fortescue is always seen as “l’enfant terrible” (terrible child!) by analysts but it does tend to fall and rise by larger amounts, so I see it as a more speculative trade. The consensus rise tipped by experts is a mere 3.7%. The table below shows how it has less fans than BHP and Rio.
Champion Iron is interesting though not in the top 20
One company that’s not a top 20 stock but is still an interesting iron ore miner is Champion Iron (CIA), as the table below shows.
CIA 24.2% $7.11
This is currently priced at $5.73 but the target consensus price comes in at $7.11. That’s a 24.2% gain ahead, if the analysts are on the money. Bell Potter likes CIA’s high-grade iron concentrates produced at the Bloom Lake mine in northern Quebec, which trade at material premiums to the 62% Fe Iron Ore index.
The analysts explain that these higher grades reduce steel-making carbon emissions by around 10%, compared with typical hematite ore. It’s felt government policy will be increasingly supportive of processes that assist decarbonising the hard-to-abate steel sector.
What happens in China is crucial
Clearly, the progress of China will be crucial to how quickly you’ll be rewarded for investing in our iron ore miners. And the commodity price of iron ore will be critical.
On September 10, the price of iron ore dropped to $US90 a tonne. It was $US140 a tonne at the start of the year! Right now, I can’t find a journalist story that builds up my confidence in a China rebound any time soon. Historically however this has often been a good contrarian sign, because these guys look at the present and the past, while the future is a little trickier, and sometimes off limits if it’s positive!
That said, Alex Gluyas in the AFR did report the following: “Commodity strategists are hopeful that Chinese policymakers will step in and defend the country’s economic growth target of around 5 per cent, which could stabilise prices. Commonwealth Bank expects that will come in the form of an infrastructure spending package, which will be announced in the fourth quarter. CBA’s FX team also expects the People’s Bank of China to cut interest rates and the required reserves ratio by the end of this month.”
Another help for iron ore investors could be the US interest rate cut cycle that started last week. Some economists are tipping nine cuts. I think that’s excessive but, all up, it should drive the US dollar down. Historically that has been good for commodity prices.
Commodities are widely priced in US dollars, so a cheaper US dollar is good for the actual price paid for these critically important inclusions in many production processes. The greenback’s expected depreciation could prove to be a tailwind for commodities such as iron ore.
The final word!
So that’s my opinion. I’m personally betting on it, and so are the analysts who watch our iron ore companies 24/7.
Important informati on: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
