Iron Ore Prices Tumble to a Decade Low (Part 7 of 7)
(Continued from Part 6)
Iron ore companies’ performance
Investors want to know which iron ore companies have been hit the hardest and which ones are doing relatively okay. In this part of the series, we’ll discuss how the various iron ore companies are doing.
Since January 2015, BHP Billiton (BHP) has been the best performer among all of the iron ore producers. Its stock price is up 4.1%. Rio Tinto’s (RIO) stock is only down 2.3% since the start of the year, despite the fact that its major revenue and earnings commodity is down ~27% YTD (year-to-date). These two companies are doing okay despite the difficult price environment due to better-than-expected results and a favorable outlook on the cost front.
Vale’s (VALE) performance is down 23.2%. The pure plays and midcaps, like Fortescue Metals Group (FSUGY) and Cliffs Natural Resources (CLF), are down 31.4% and 31.5%, respectively.
Scale matters
The above graph shows that Rio Tinto and BHP Billiton haven’t suffered as much from falling iron ore prices. Strong cost positions allowed these companies to do better in this price environment. For these two players, the break-even rate is between $45 and $55 per ton. This provides a cushion at the current levels.
For pure plays and smaller players, like Fortescue Metals and Cliffs Natural Resources, the remaining margin cushion is too low at the current levels. This makes these companies much more sensitive to iron ore prices. Cliffs Natural Resources has company-specific issues like huge debt that have made matters worse.
Funds like the iShares MSCI Global Metals & Mining Producers ETF (PICK) offer good ways for investors to gain exposure to the iron ore sector without choosing individual company stocks. BHP Billiton, Rio Tinto, and Vale form 17.9%, 10.8%, and 2.6% of PICK’s holdings, respectively.
To take a broader approach toward investing in this sector, you can look at the SPDR S&P Metals and Mining ETF (XME). Cliffs Natural Resources forms 3.6% of XME’s holdings.
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