As we’ve been covering here at Markets & Money, the price of iron ore has experienced a recovery. Today, we will be looking at the four major ASX mining companies and their prospects in the months to come. These include, BHP Group Ltd [ASX:BHP], Rio Tinto Ltd [ASX:RIO], South32 Ltd [ASX:S32] and Fortescue Metals Group Ltd [ASX:FMG].
Below you can see how the four major mining companies have performed since iron ore began its recovery:
Digging into the details
First question straight off the bat is why FMG lagged behind for so long?
Part of this could be down to the fact it is the smallest of the bunch, but there is an air of mystery to it.
Fortescue is all about iron ore and perhaps fears about the trade war may have weighed down its price during this period.
It has quickly caught up to its peers, however.
South32 does not do iron ore, but it seems to have caught the wave, with prices for aluminium manganese, nickel, thermal and metallurgical coal all remaining (relatively) stable. It has also been recently engaged in a share buy-back scheme (until November).
BHP’s share price has also been buoyed by a share a major buy-back scheme as well as a special dividend from the sale of its onshore US assets.
Finally, Rio Tinto just before entering this period, announced a $2.6 billion investment in the Koodaideri iron ore mine in the Pilbara, complete with automation.
So it has been mostly good news for the four major Australian miners, but will iron ore and commodity prices continue their run?
Answering this question hinges largely on one thing — China.
China begins to cut RRR, stimulus chances growing
On Friday, China made a move to cut its reserve requirement ratio (RRR) by one percentage point, freeing up $116 billion for new lending.
The flow on effects to the Chinese economy could be limited, but should be positive nonetheless.
The government has also indicated that further steps are in the pipeline, including infrastructure spending and tax cuts.
Perhaps even, and this would be remarkable, a state-backed purchase of shares.
Looking ahead, the health of the Chinese economy could play a major role in the share prices of these four companies.
Of the four, South32 has the most attractive P/E ratio (9.7) but given its exposure to a larger variety of resources, could represent a slightly riskier investment if you don’t have a handle on how its portfolio of resources will perform.
FMG can lay claim to being the lowest cost producer of seaborne iron ore to China, but again is highly sensitive to this market — things such as steel mill inventories could be a factor. It also has $6.9 billion in revenue and $3.1 billion in net debt (gross less cash).
Rio Tinto has a strong dividend yield of 5.04% and a superior P/E ratio (10.9) to BHP, which sits at 36.6.
Rio Tinto has an EBITDA of US$9.2 billion for H1FY2018 and net debt of US$5.2 billion.
As a result, and depending on how confident you are in China delivering on its stimulus plans, there are some potentially attractive companies amongst this cohort.
A note of caution however, Markets & Money is largely bearish on the overall market in the mid-term.
Something to keep in mind, especially with regards to the blue chip Rio Tinto and BHP stocks.
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