For Immediate Release Chicago, IL – October 16, 2015 – Stocks featured in this week’s Zacks Industry Rank analysis include Rio Tinto Group (RIO), BHP Billiton (BHP), Vale (VALE) and Fortescue Metals Group ( FSUGY). Zacks Industry Rank Analysis is written by John Blank, PhD, Chief Equity Strategist, Zacks.com. Buy into Mining without Jumping on a Grenade Is it time to buy a miner? Yes, I know. You might jump on a grenade.
But there is a little light at the end of the tunnel. Iron Ore miners get high Zacks Industry Rank marks this week, after a spate of earnings estimate upgrades. What’s the catch to that? There are only 5 companies in the industry. And the earnings estimates are going from losing money over the next year to making nothing.
Having written that, both agreement and magnitude in recent Zacks Rank earnings estimates turned POSITIVE for Iron Ore stocks. There are recently upgraded Zacks #2 Rank Iron Ore stocks to tell you about.
However, the rest of the mining sector, taken in total, is not looking so hot.
The idea early investors have (those who are bullish) is that once oil prices turn around, and China turns around -- you get in on this beaten down sector.
Here is the Recent Breakdown of Zacks Miners:
Zacks Mining-Iron industry (with 5 companies) scored a #18 Zacks Industry Rank out of 265 industries, down from #15 over the last week. There are 5 positive revisions to just 1 negative revision.
Zacks Gold Mining (with 36 companies) industry was at #116, down slightly from #113 last week. There are 23 positive revisions and 23 negative revisions.
Zacks Mining-Misc. (with 40 companies) was at #192, around the same as the #202 last week. There are 10 positive revisions and 25 negative revisions. Zacks Mining-Non Ferrous (with 13 companies) industry was at #229, another poor showing, after a week at #245. There is 1 positive revision and 17 negative revisions.
The Outlook for Iron Ore Prices For an iron ore price outlook, I drew upon a recent Financial Review article posted on Oct. 9th, 2015. This is the key question for investors. We need to watch for a bottom in Iron Ore prices. No forecaster ever gets this call right, by the way. They will stay bearish too long, as they keep watching current Iron Ore price trends. “Iron ore will extend declines in 2016 on rising low-cost supplies from the world's largest miners, weak demand growth in China and a stronger greenback,” according to BMI Research, while Goldman Sachs Group repeated a forecast for lower prices. Prices will trade between $US50 and $US60 a metric ton over the remainder of this year, then drop to a range of $US45 and $US55 in 2016, BMI said in a report emailed Monday. Ore with 62 per cent content delivered to Qingdao rose 1.1 per cent on Monday to $US56.61 a dry ton, according to Metal Bulletin Ltd. Iron ore has dropped 21 per cent this year as Rio Tinto Group (RIO) and BHP Billiton (BHP) in Australia and Brazil's Vale ( VALE) boosted low-cost supplies to increase market share even as demand growth stalled in China. Steel consumption in China was seen shrinking by an average of 1.3 per cent annually between this year and 2019, BMI said. "Global iron ore majors will continue to ramp up production to squeeze out higher-cost competitors," said BMI. "BHP Billiton, Rio Tinto and Vale all reported record output in 2014 and will increase output further in the quarters ahead." Supply additions by the four largest producers have overwhelmed output cuts elsewhere, according to Morgan Stanley. There's also the prospect of the first cargoes from billionaire Gina Rinehart's new Roy Hill mine, which is set to start shipments this month, the bank said in a report on Monday. Demand for seaborne iron ore will probably peak next year, while mining capacity continues to rise, Goldman said on Monday, citing higher productivity at existing mines as well as new projects such as Roy Hill. The bank repeated forecasts for prices to drop to $US44 next year and $US40 in 2017. Rio Tinto and Fortescue Metals Group (FSUGY) are set to deliver quarterly operations figures this week. Fortescue, which raised shipments from 28 million tons in 2009 to 165 million tons in the year to June 30, has said it plans to maintain cargoes at the current level amid weaker prices. Fortescue climbed 5.3 per cent to $2.40 in Sydney, the highest close since June 15, amid speculation that commodities prices may be bottoming. In London, Rio stock was 0.4 per cent lower after gaining 16 per cent last week. Beyond 2016, more Chinese ore production is expected to come offline, reducing the global oversupply and preventing a further weakening of prices, BMI said. Chinese steel production won't collapse as provincial governments seek to maintain employment levels and export growth continues, it said.”Australia’s Fortescue and Brazil’s Vale are in the much higher ranked Mining-Iron Ore industry, but have very low ($3 to $5) share prices — and show annual earnings that are negative or just turning positive now."
(1) Fortescue Metals holds a Zacks #2 Rank (Buy).
Shares traded at $3.15 a share when I looked. The 2016 annual EPS estimate just went from -$0.08 a share to $0.09 a share 7 days ago. That produced the recent Zacks #2 Rank upgrade.
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.
In May 2015, Australia’s Foreign Investment Review Board (FIRB) received multiple applications for permission to invest in Fortescue. While a takeover attempt was not made, reports indicated interest from Chinese investors in acquiring a stake in Fortescue. Among the interested parties was China's state-run steel company, Shanghai Baosteel Group Corporation. The company recently guided for a flat production of 165 million tons for fiscal 2016.
(2) Vale SA holds a Zacks Rank #2 (Buy).
Shares traded at $4.80 a share when I looked. Vale SA also forms 0.8% of the SPDR S&P Global Natural Resources ETF’s (GNR) holdings.
The 2016 annual EPS estimate just went from $0.45 a share to $0.47 a share 7 days ago. That produced the recent Zacks #2 Rank upgrade for the stock. It reports its next quarterly EPS report on Oct. 22nd.
Vale SA is a mining company engaged in the mining of iron ore and pellets, nickel, manganese and ferro-alloys, gold, nickel, copper, kaolin, bauxite, alumina, aluminum and potash. It operates logistics systems in Brazil, including railroads, maritime terminals and a port. Vale SA is based in Rio de Janeiro, Brazil.
Vale’s huge S11D mine could be the game changer.
Vale SA’s production guidance for 2015 is 340 million tons. However, the company commented that for 2016, the production should be lower than its previous guidance of 376 million tons.
The biggest iron ore expansion project currently under progress is Vale’s S11D project, located in the Carajás mining district in the Para region of Brazil.
The S11D project should increase the mining and processing capacity at Vale’s Carajás mining complex by 90 million tons per year to 450 million tons. This area is very rich in iron ore content and produces ~67% iron ore. The expected start date of the project is late 2016, but it should gradually reach its full capacity of 90 million tons. When Vale’s S11D project comes online, it could be a further game changer in the iron ore market. Its cash costs per ton are pegged at close to $11 per ton.
Australia’s BHP Billiton and Brazil’s Rio Tinto are in the much lower ranked Mining-Misc industry, but have much higher ($36 to $39) share prices -- and much, much better annual earnings estimates.
(3) BHP Billiton holds a Zacks Rank #5 (Strong Sell). Shares traded at $36.40 when I looked. The stock gets a Zacks D rating for growth and a B rating for value. However, current year 2016 estimates are for $1.08 in annual EPS. 2017 is at $1.50. The annual estimates have been trending lower, hence the weak Zacks rank. But the year-on-year improvement to 2017 looks strong.
BHP’s latest production guidance for fiscal 2016, ending June 30, was an increase of +6% year-over-year to 247 million tons in 2015.
(4) Rio Tinto gets a Zacks Rank #3. Shares traded at $39.10 when I looked. The stock gets a Zacks B rating for Growth, an A rating for Value and an A rating for momentum. Here, we see $2.50 a share guidance for 2015 and $1.98 a share guidance in 2016, with no mention of 2017. 2015 estimates have been going up, though, which shows up in a #3 rank.
RIO’s recent guidance was for shipments of 340 million tons for 2015. This is 10 million tons lower than previous guidance. However, the downgrade was mainly due to the weather issues in the first half of the year than any strategic change.
My Conclusions on Mining
Yes, I know. You might jump on a grenade.
But the fact of investing (not trading) is to put money to work when there is “blood in the streets.” We have the early signs of a turn in oil prices, and many calls for a bottom there.
China’s domestic iron ore mines are exhausted. They will keep building and building.
No. I won’t think you are crazy. The latest Zacks Industry Ranks tell you to start -- at least! -- to pay attention to the mining sector. Happy investing! Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today. Find out What is happening in the stock market today on zacks.com.
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