Investing in iron ore companies?

[DTEJD1997]

Hey all:

 

Anybody else investing in the iron ore miners?

 

I am starting to....Some of them have pretty good balance sheets and are paying rather substantial dividends, even after cuts, AND even after future anticipated cuts...The P/E's are also silly low...I'm talking about low single digits 3,4,5.

 

The first one I'm thinking of is Kumba Iron Ore (KIROY).  Seems to be a very well run company.

 

There are also several in Australia and Brazil.  These guys have MUCH lower operating costs than most other mines in the world.  I imagine if they can't make money, NOBODY in this industry will be able to make any.

 

I'm also thinking that a lot of these stocks will be under selling pressure between now and the end of the year.  Most investors sell LOW and buy HIGH.  Thus, we should see lots of selling pressure in these names.

 

Reminds me of the situation with the gold miners last November...I did very well with those, and I hope to repeat it in the upcoming year.

 

Any thoughts?  Comments?

 

 

[meiroy]

 

jumping off tall buildings much?

[Guest JoelS]

Kumba Iron Ore break even price is around $75. Too high for me given that I don't believe this is a temporary blip in iron ore prices, and I don't think iron ore is analogous to gold. This is a commodity cycle more cyclical than most, driven by incremental demand from the chinese, which is running out of construction steam. As the smaller players go down, they will continue to pump out ore, even in administration. The only winners will be the big players, Rio, BHP, Vale etc and that will be after the dust has settled and the blood has been cleaned from the street. I could be wrong.

[ItsAValueTrap]

Kumba's two major mines are the Sishen and Kolomena mines.

 

Sishen (three quarters of the company's production):

US$33.81 unit cost

US$27.75 cash cost

 

Kolomela:

US$25.05 unit cost

US$18.90 cash cost

 

I don't think that they are lying about these cash costs???  These are ridiculously low cash costs by the way.

 

2- Free cash flow of roughly 17M Rand versus 54M Rand in revenue gives an after-tax margin of about 31%.  That's pretty high.  (It's probably more accurate to use their earnings because I think they are spending cash on expansion capex.)

 

3- I like management (*they aren't superstars).  These are wonderful assets... very high grade, very high margin.  Because of almost no debt, they will be able to weather any storm.

 

Unfortunately I'm bearish on iron ore.  It looks like the wave of overbuilding will arrive.  But even if you think that the floor for iron ore is at $60, I think you'd do fine with this stock.

 

*I normally hate almost every mining stock I see.  This stock is an exception.

[jouni1]

*I normally hate almost every mining stock I see.  This stock is an exception.

;D it seems like it would be a perfect takeover candidate for anglo. is there a reason it's public? i mean, are they allowed to buy it out?

[yadayada]

investing in mining just seems pointless. Has murphy's law written all over it. 50k stocks out there and you want to invest in something like that?

[Liberty]

investing in mining just seems pointless. Has murphy's law written all over it. 50k stocks out there and you want to invest in something like that?

 

I agree.

 

Commodity business + capital intensive + known for shady operators + many technical reasons why you can't be sure what you're buying + dependent on macro factors + nobody can predict how long cycles will last.

 

Seems like a 12-foot hurdle to me, but I know many are good enough to pull it off. I just know I should stay away even when things look attractive.

[ItsAValueTrap]

DTEJD1997, have you looked at their land?  They might have good prospects for other massive deposits with ultra-high margins.

[topofeaturellc]

Kumba is a good asset the question is what spread over those cash costs the shares are pricing in.  I've not looked at kumba but I have looked at others and it doesnt seem like they are pricing in something much below current spot - which given the new capacity coming in the next few years, as well as what it costs the majors to bring capacity on line at solid returns, doesn't seem especially pessimistic.