Six Iron Ore stocks to look at

Iron Ore Stocks have been on a swing in the past few months. On May 22, 2017, iron ore futures’ movement drove many stocks high while a decline in Chinese iron ore futures added to a slightly weaker session early on May 23, 2017. Given the volatile environment, many miners are also now aiming to diversify away from the iron ore portfolio and one example of this is Fortescue Metals. Given the ecosystem, some stocks are still expected to deliver value going forward. 

Rio Tinto Limited

RIO Details
Met expectations despite disruptions: Rio Tinto Limited (ASX: RIO) has announced for an offering to buy back $2.5b in bonds to cut its debt. RIO has issued a redemption notice for $1.72b of its 2019 and 2020 US dollar-denominated notes and has also started cash tender offers to purchase up to $781m of its five 2021, 2022 and 2025 US dollar-denominated notes. This move has come as a part of the ongoing capital management plan. RIO earlier reported that they delivered Pilbara iron ore shipments of 76.7 million tonnes in the first quarter of 2017 (100 per cent basis). However, the ship loading was impacted by cyclone activity during the period, and sections of the rail network were affected by significant rainfall. Despite these disruptions, the shipments were in line with the first quarter of 2016 while guidance for 2017 remains at 330 to 340 million tonnes. The first quarter bauxite production reached 11.3 million tonnes and aluminum production reached 889 thousand tonnes which were both two per cent higher than the corresponding quarter of 2016. Additionally, RIO has announced that it had reached a binding agreement for the sale of Coal & Allied Industries to Yancoal Australia for up to $2.45 billion (expected to finish by second half of 2017 but is subject to shareholders’ approval). RIO stock has risen 11.13% in the last six months (as on May 22, 2017) despite volatility in commodity prices.
 

Value Proposition (Source: Company Reports)
 
Given the strength in balance sheet, drive from supportive Chinese indicators, and world class portfolio, we expect an upside going forward; and give a “Buy” recommendation on the stock at the current price of $ 64.74
 

RIO Daily Chart (Source: Thomson Reuters) 

Atlas Iron Limited

AGO Details
Exiting Wodgina mine:Atlas Iron Limited (ASX: AGO) witnessed an initial stock price surge of 6.25% on May 23, 2017 with iron ore price movement but closed flat at the end. For the March 2017 quarter, AGO reported for $108m as cash at hand and a net operating outflow of $22m. However, the group shipped 3.2m wet metric tonne (wmt) in the March quarter of 2017 which is in line with the guidance (expected decline at Wodgina). Wodgina mine exit plan has also been agreed with Mineral Resources to reduce the cost. Moreover, AGO has reduced the term loan B to A$112 million at March 31, 2017 exchange rate. AGO was expected to pay $8m off its debt in April 2017 and also has set aside A$20m to help fund AGO’s next mine (Corunna Downs). The group even sold 51% stake in Cisco Lithium Prospect to Pilbara Minerals. However, given some level of volatility, we maintain an “Expensive” recommendation on the stock at the current price of $ 0.016
 

AGO Daily Chart (Source: Thomson Reuters) 

Fortescue Metals Group Limited

FMG Details
Successfully completed fund raising:Fortescue Metals Group Limited (ASX: FMG) has recently finished an offering of senior unsecured notes. The offering was initially launched at US$1,000 million; and based on investors’ demand, the offering was upsized to US$1,500 million. For March 2017 quarter, FMG reported shipments of 39.6mt of iron ore with 12% improvement in cash production costs (C1) of US$13.06 per wet metric tonne (wmt) over the prior corresponding period. FMG stock has recovered over 11.4% in the last five days as on May 22, 2017, driven by the rally in iron ore prices. However, the heavy fall in iron ore prices in the last few months might have impacted the group’s margins to some extent. We believe it will be prudent to watch out for the next quarter results (to be released on July 27, 2017), while maintaining an “Expensive” recommendation on the stock at the current price of $ 5.26
 

FMG Daily Chart (Source: Thomson Reuters) 

BHP Billiton Limited

BHP Details
Rising production to offset pricing pressure: BHP Billiton Limited (ASX: BHP) has achieved a record production at Western Australia Iron Ore (WAIO) and five Queensland Coal mines in the nine months ended March 31, 2017. The group has reduced its full year copper and metallurgical coal production guidance. Particularly, the copper production guidance has been reduced to be between 1.33 and 1.36 Mt after the 44 days of industrial action at Escondida. The commissioning of the Escondida Water Supply project and the planned ramp-up of the Los Colorados Extension project are now expected in the September 2017 quarter. Further, damage to the third-party rail infrastructure caused by Cyclone Debbie led to the reduction in metallurgical coal production guidance to be between 39 and 41 Mt. On the other hand, the full year production guidance is maintained for petroleum and energy coal.
 

Broad Suite of Opportunities (Source: Company Reports)
 
Given the group’s efforts relating to cost control (expected to generate 10 per cent value uplift) and decent production (with growth projects valued at US $25 billion), we believe that the recent rally in the iron ore prices would further drive the momentum.We give a “Buy” recommendation on this dividend yield stock at the current price of $ 24.34
 

BHP Daily Chart (Source: Thomson Reuters) 

BC Iron Limited

BCI Details
Returned to profit in 1H FY 17: BC Iron Limited (ASX: BCI) witnessed an initial stock price surge of about 3.5% on May 23, 2017 but closed flat. The group has returned to profit in 1H FY 17 and shipped 1.8 million wet metric tonnes from the mine in the March 2017 quarter. This was considered a strong operational result given the significant rainfall that occurred in the Pilbara region during the quarter. The group’s Iron Valley EBITDA for the quarter was A$4.1M (unaudited). BCI’s FY17 Iron Valley EBITDA guidance remains unchanged at A$18-25M. Meanwhile, Carnegie Potash Joint Venture entered with Kalium Lakes enables BCI to earn up to a 50% interest by sole-funding key activities. Further, the scoping study on a 3 Mtpa solar salt operation at Mardie has progressed well, and is expected to get over by June 2017 quarter. BCI is targeting for building a diversified portfolio covering multiple commodities. Given the potential, we put a “Speculative Buy” recommendation on the stock at the current price of $ 0.14
 

BCI Daily Chart (Source: Thomson Reuters) 

Sims Metal Management Limited

SGM Details
Improved result but softness in topline: Sims Metal Management Limited’s (ASX: SGM) stock slipped about 1.5% on May 23, 2017 while some of the peers witnessed an initial rally owing to commodity prices. SGM has reported an underlying NPAT of $60 million in the first half of FY 17. The underlying EBIT of $77 million in 1H FY17, was significantly higher than a loss of about $5 million in 1H FY16, and above the underlying EBIT of $63 million in 2H FY16. The improved result was due to internal streamlining and optimization initiatives, and increased sales volumes.
 

1H 17 Financial Performance (Source: Company Reports)
 
On the other hand, the sales revenue of $2,385 million in 1H FY17 was down 1% compared to 1H FY16, due to adverse currency translation, which could be a concern going forward as well. Although lower steel exports from China are expected to help ease competitive pressure with support from higher demand for ferrous scrap metal, the volatile conditions do prevail.We give an “Expensive” recommendation on the stock at the current price of $ 12.90
 

SGM Daily Chart (Source: Thomson Reuters)

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