Iron is one of the most important commodities in the world. It's the largest global metals market, with the economy using more iron by volume than any other metal. That's because it's a crucial ingredient in making steel, which is in everything from buildings and bridges to pipelines and appliances. Iron is also essential for renewable energy because steel is the main component in wind turbines.
Given iron's vital role in building the infrastructure needed to expand the global economy, it's a key metal for investors. Overall, it's the third-largest commodities market by dollar value behind oil and gold.
But despite its size and importance, not that many companies focus on mining the metal. It's so costly to produce that companies need to operate a large-scale position in an area where ore is abundant to make it economical. As such, while there are hundreds of oil stocks and dozens of publicly traded gold mining companies, investors will only find a handful of top iron stocks.
Here's a look at the best four for investors to consider if they want to participate in this vital market.
Digging into the best iron stocks
Due to the high costs of producing iron, only seven publicly traded companies focus on the metal because there aren't very many worthwhile metal deposits. Meanwhile, just four companies -- BHP Group (NYSE:BHP), Fortescue Metals Group (OTC:FSUM.F), Rio Tinto (NYSE:RIO), and Vale (NYSE:VALE) -- control 70% of the global seaborne iron-ore export market. That's why these four top the list of iron stocks that investors should consider:
What Makes It a Top Buy?
An 85% stakeholder in Western Australia Iron Ore, one of the largest integrated iron ore operations in the world.
Fortescue Metals Group
The world's fourth-largest iron ore producer.
It operates the world's largest integrated portfolio of iron assets.
The largest iron ore producer in the world.
Here's a closer look at these top iron ore stocks.
BHP Group: The diversified iron ore producer
BHP Group is one of the world's largest resources companies. In addition to being one of the "big four" iron ore producers, it also mines copper, coal, nickel, and zinc, and has a potash mine under development. Meanwhile, BHP Group also has a petroleum business that produces oil and gas in the U.S., Australia, and Trinidad and Tobago.
While BHP Group is a diversified resources company, iron is its biggest moneymaker. The company's iron ore business contributed $11.1 billion of EBITDA during its fiscal 2019, about 48% of the group's total. Copper was the next largest contributor at 19% of EBITDA, followed by coal at 17% and petroleum at 16%.
The global resources giant produced 238 million tons of iron ore in its fiscal 2019, which was roughly flat with 2018's level. But BHP Group's iron ore EBITDA increased by nearly 25% year over year, mainly due to higher realized prices.
All of the company's iron ore output in fiscal 2019 came from its interest in Western Australia Iron Ore, which is a series of joint ventures (JVs) in the iron-rich Pilbara region of northern Western Australia. The company and its partners operate four joint ventures: Mount Newman, Yandi, Mount Goldsworthy, and Jimblebar, with BHP Group holding an 85% interest in each one. These JVs control an integrated system consisting of four processing hubs and five mines connected by more than 600 miles of rail and port infrastructure to get the ore to global markets.
BHP also holds a 50% interest in the Samarco mine in Brazil, which it co-owns with Vale. But the companies suspended operations at the mine in 2015 following a disaster that killed 17 people. They've since spent billions of dollars on fines and cleanup costs, which enabled them to receive permission to restart the mine. They expect that to happen by the end of 2020, aiming to get production up to 14 million to 16 million tons of ore within six years -- well below its 25 million tons before the accident.
The upcoming restart of Samarco is one of two notable future production drivers for BHP Group's iron ore operations. The other is the South Flank project in Australia, which should start up in 2021. The company is investing more than $3 billion in the project so that it can eventually replace the 80 million tons of annual output at the Yandi mine when it depletes.
BHP has a top-tier iron ore business with visible growth prospects. But there are some company-specific issues that investors need to note. One is its diversification. While that helps reduce some risks, it can cause other problems. For example, BHP doesn't have as much upside to higher iron ore prices as its more focused peers, which could cause its stock to underperform them in a strong market. Meanwhile, BHP produces dirtier fossil fuels like oil and coal, which is a potential problem given the rise in climate change concerns in recent years. Those commodities could prove to be much less valuable in the future if the global economy accelerates its adoption of renewables. But such a move would benefit iron ore producers since steel is a crucial component of wind turbines.
BHP Group's exposure to fossil fuels aside, it's among the leaders in the iron ore sector, which makes it one of the top stocks in the industry to buy.
Fortescue Metals Group: The growth-focused iron stock
Fortescue Metals Group, or FMG, is an Australia-focused iron ore producer. It operates two mining hubs in the Pilbara region of Western Australia: Solomon and Chichester. It also has an integrated port and railway system with roughly 400 miles of track to get its ore to export markets like China.
The Chichester hub consists of two mines, Cloudbreak and Christmas Creek, that have the capacity to produce 100 million tons of ore per year. The Solomon hub, meanwhile, also supports two mines, Firetail and Kings Valley, which have the capacity to produce between 70 million to 75 million tons per year.
In addition to FMG's two operating hubs, it has two major iron projects under development. The company is investing $1.275 billion on the Eliwana mine and rail development. The mine will produce 30 million tons of ore per year when it comes on line at the end of 2020 and will connect to the Solomon hub via a roughly 90-mile rail line. The company is also a partner on the $2.6 billion Iron Bridge project, which will have the capacity to produce 22 million tons of ore when it comes on line in mid-2022.
On top of its development projects, FMG also has an extensive exploration portfolio. It's one of the largest acreage holders in the Pilbara region, where it's searching not only for new iron deposits but also copper and gold. It's also exploring for metals in Ecuador, Colombia, and Argentina. It's drilling prospective copper targets in Ecuador, while working on a potential copper and gold mine in Argentina.
FMG has a large and growing iron ore operation. But its primary focus is on selling iron to China, which is a risk worth noting. While that country is the largest manufacturer of steel in the world (thus the top consumer of iron), FMG's dependence on the Chinese steel market could prove problematic. For example, China's government has mandated steel production reductions in the past due to environmental issues, which has hurt iron demand. Meanwhile, the ongoing trade dispute with the U.S. has weighed on its economic growth in recent years. This slowdown has affected its steel consumption as well as the need for iron. These issues are leading FMG to diversify its customer base by recently expanding into new markets like Japan, South Korea, and India.
While FMG's outsize exposure to the Chinese market is worth noting, the company is one of the dominant forces in the iron sector. That makes it one of the top stocks to buy for exposure to that key metal.
Rio Tinto: The high-tech and clean iron company
Rio Tinto is a diversified mining company. It operates four business units: aluminum, iron ore, copper and diamonds, and energy and minerals. In 2018, the company produced $18.1 billion of EBITDA, about 62% of which came from its iron ore operations. Its aluminum business was the next largest contributor at 17% of its EBITDA, followed by its copper and diamonds business at 15%, with energy and minerals rounding things out at 7%.
The global mining giant produced 338 million tons of iron ore in 2018, up about 2% from 2017's level. All that output came from the Pilbara region, where it operates the world's largest integrated portfolio of iron ore assets. That business consists of 16 mines, four port facilities, and more than 1,000 miles of rail infrastructure. The company is also the world's largest autonomous-truck operator, which has increased its efficiency while lowering its costs.
Rio Tinto has two other iron-related assets, which are part of its energy and minerals segment. It owns the Iron Ore Company of Canada (IOC), which is a leading Canadian producer of iron ore concentrate and pellets. IOC operates a mine and more than 250 miles of rail that connect it to a port. It produced 9 million tons of iron pellets in 2018, which was down 20% from the prior year due to a strike. Rio Tinto also owns the Simandou project in Guinea, which is one of the world's largest untapped iron ore deposits.
The company's iron-focused investments, however, are in Western Australia. In 2018, it approved the $2.6 billion Koodaideri phase 1 project, which will be a new production hub in the region. The project should come on line in late 2021 and have the capacity to handle 43 million tons of ore per year, enabling the company to replace depleting mine production elsewhere. It's also spending money on a pre-feasibility study into Koodaideri phase 2, which could boost the hub's production capacity to more than 70 million tons in the years ahead.
Rio Tinto has worked hard over the years to reduce risk. For example, it sold off its coal mining assets in 2018 to not only reduce its climate-change-related risks but also bolster its balance sheet. As a result of asset sales like that, it paid off nearly $10 billion in debt during the 2016 to 2019 time frame, giving it one of the strongest balance sheets in the sector.
But it isn't without issues. One is that all the money the company is pouring into its iron business isn't going to increase its output. Instead, these investments will offset the depletion of its legacy mines. As such, its iron-related earnings will only expand if it reduces costs or prices rise. That lack of visible growth could cause it to underperform faster-growing rivals if demand for the metal surges in the coming years. That could happen if the adoption of renewable energy accelerates, powering the need for more steel to make wind turbines.
Vale: Cleaning up its iron ore operations
Vale is the world's leading producer of iron ore and nickel. The Brazilian company also mines copper, coal, manganese, and ferroalloys (a blend of iron with another metal). In addition to its mining business, Vale has major operations in logistics, power, and steelmaking. Iron, however, is by far its main moneymaker at 89% of its total earnings in 2018.
Vale produced 385 million tons of iron ore in 2018 from 22 mines in Brazil as well as from pellet plants in that country, Oman, and China. Most of the company's Brazilian mines are in the northern Carajas region. On average, rocks in Carajas contain 67% iron ore, which is the highest concentration in the world. Because of that, Vale can produce iron very economically.
But the company's iron ore sales volumes are on track to decline to a range of 307 million to 312 million tons in 2019. The main issue weighing on output was another devastating mining disaster in January 2019. A dam supporting a mining tailings pond in Brumadinho failed, releasing toxic floodwaters into the surrounding area. The tragedy killed more than 250 people, forcing the company to stop production in the affected area.
The company's poor environmental track record in recent years is a risk that investors should note. Vale has been working to not only make reparation for the Brumadinho and Samarco disasters but also ensure that no more of its mining dams fail. The company has been shoring up old tailings ponds as well as working to move more of its mining operations to dry processing, with plans to invest $1.8 billion between 2020 and 2024 on that initiative. In addition, it's taking several other steps to become a cleaner company, including a goal to be carbon neutral by 2050. Among the initiatives it's working on is an aim to self-generate 100% of its energy from clean sources, reduce its new water collection by 10%, and recover and protect more than 1 million acres of forest land.
Vale also plans to get its iron business back on track. It expects to get its production volumes back to 2018's level by 2021 with an output between 375 million and 395 million tons. And it believes it can get to a range of 390 million to 400 million tons by 2022.
Two factors will drive this growth. First, it expects to bring currently curtailed mines like Samarco back on line. Meanwhile, it will also benefit from the continued production growth of its recently completed S11D mine. Vale spent $14.3 billion to bring that location on line. After producing 55 million tons in 2018, it should reach its current capacity of 90 million tons in 2020. The company is also investing another $770 million to boost that mine's capacity to 100 million tons by 2022.
Vale is the global leader in the iron ore sector. While it has had some disasters in the past, it's working to clean up its operations and image. Add that to the fact that its output is on track to grow past its prior peak, and it remains one of the top ways to invest in the iron sector.
The big four dominate
With a commanding 70% share of the global seaborne iron-ore market, these four mining companies dominate this sector. Because of that, they're by far the best stocks for investors if they want to profit from the expected growth of iron demand as steel consumption increases.
Each one offers a unique way to invest in the iron industry. FMG and Vale are largely pure plays on the sector, with FMG offering a healthier growth profile while Vale is a bounce-back candidate. Rio Tinto and BHP Group, on the other hand, are more-diversified mining companies. Rio has a cleaner portfolio, while BHP offers the most diversification across the global commodity space, making it more of a one-stop shop for investors.