Better Outlook for Iron in 2014: Should You Buy?

What's the outlook for Cliffs Natural Resources, BHP Billiton, and Vale?

Jan 31, 2014 at 11:45AM

As you know, demand for raw materials used in steel production is mostly driven by rapid industrial growth in China. And, although iron ore prices have dropped in 2014 so far, Credit Suisse is contemplating a scenario in which Chinese steel production reaches 840mt in 2014, with iron ore prices around $120/t. So, the outlook is fairly positive.

Two drivers might push iron ore prices up: pollution controls in China is pushing premiums for pellets, lumps, and higher quality ore; freight rates prices, especially Brazil-China freight, have dropped. In this context, and considering that the world will experience a 4% growth in steel consumption in 2014 following a stronger recovery in the American construction and automobile sectors, it would be interesting to analyze which companies are better positioned to profit from iron ore production. Here are three.

Expanding
First, we have the largest producer of iron ore pellets in North America, Cliffs Natural Resources (NYSE:CLF)

Driven by cost reduction measures in SG&A and exploration, as well as higher iron ore pricing, third-quarter results brought higher profits. Sales margin grew to $349 million with iron ore sales volume decreasing 2.5% to 11.7 million tons -- decent news, but not overly impressive.

Cliff is expanding at the Empire and Tilden mines, and increased its ownership from 70% to 100% in the United Taconite mine in Minnesota. With about 64% of the company's blast furnaces running currently in North America, iron ore production capacity is expected to increase. Moreover, its acquisition of Wabush mine will expand Cliff's international exposure, and add 6.4 million tons of iron ore pellets to its annual production capacity.

However, weak pricing for coal products is putting its North American coal segment under pressure. The division suffered a 23% drop in revenues on a per ton basis the most recent quarter.

Finding demand for its ore
Second, we have Brazil-based Vale (NYSE:VALE), a huge player in the iron ore industry.

Third-quarter results improved year over year for Vale, with earnings per ADR up 59%, and revenues climbing 11% to $12.9 billion.

The company is increasing its production of most of its metals, and, given the momentum of its research and development projects, we should see more expansion coming up. In fact, this last quarter Vale shipped 83.6 million tons, the third highest for the quarter in history. Plus, its cost-reduction program, which involved heavy divesting of non-core assets, will increase profitability.

Although rising demand in Brazil is giving Vale a geographical advantage, rising operational costs pushed by mining cost inflation puts a cap on margins.

In good shape
Finally, we have the diversified natural resources company BHP Billiton (NYSE:BBL). The company produces lump and fine iron ore product in Australia, and iron ore pellets in Brazil.

Better than anticipated performance in Pilbara, Australia led to a stronger than expected first quarter 2014. Iron ore output reached a record 46 million tonnes in the region, and if we add its Samarco production in Brazil, total forecasted production for 2014 arrives to 192 million tonnes.

Considering that iron ore generated almost 60% of BHP Billiton's earnings in fiscal 2013, this year could drive more profits for the company. BHP Billiton managed to get lower-cost volume gains, which is not easy in this industry, and committed to a 'substantial' increase in free cash flow to be destined to increase shareholder return.

Final thoughts
Despite some improvements, Cliffs still presents excess capacity. And, if we consider coal's current prices, increased profitability will take time.

Considering the increasing urbanization taking place in Brazil, and the fact that high quality ore and pellets are finding good demand in China due to higher standards, we may see higher than expected realized prices driving earnings surprises for Vale. Pay attention to rising costs and profitability, though.

For similar reasons BHP Billiton's operations in Brazil might experience a boost. The company is well-positioned to profit from iron ore this year.

Louie Grint has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers