Iron Ore Stocks – Do they provide shareholders with a decent return?

Iron Ore Stocks - Do they provide shareholders with a decent return
Introduction

At the time of writing, Iron Ore fines 62% Fe CFR Futures, United States, was trading at US$90.76 (14:05 (UTC+11)). It recently made its 52-week high at US$123.19 on July 1, 2019, since then it has declined to present level by ~26.32%. As macro-economic concerns especially from US-China trade deal and Brexit are cooling off, global growth is expected to revive in the coming times. With this, higher capital expenditure on infrastructure projects may lead to higher consumption of Iron and Steel. Companies benefitting from such opportunities are Mount Gibson Iron Limited (ASX: MGX), BHP Group Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Ltd (ASX: FMG) and Grange Resources Limited (ASX: GRR)

Mount Gibson Iron Limited (ASX: MGX)

Mount Gibson Iron Limited (ASX: MGX) is involved in mining and processing of hematite iron ore at the Extension Hill mine in the Mid-West region of Western Australia, treasury management and mineral resources acquisitions and investments. Recently the company published its September 2019 Quarterly report, where it highlighted that the total iron ore sales stood at 1.4 million wet metric tonnes (Mwmt), which comprised 0.7 Mwmt of high-grade direct shipping ore (DSO) and 0.7 Mwmt of low-grade material from Extension Hill stockpiles in the Mid-West. Sales revenue for the period stood at $122 Mn Free on Board (FOB). Group’s cash costs for the quarter stood at $74/wmt FOB, which was in-line with guidance.

Operating cash flow stood at $25 Mn. Cash and liquid investments at the end of the period stood at $407 Mn. Full year net profit after tax for the period was reported at $133.4 Mn. The Board of Directors proposed fully franked dividend of 4.0 cents per share. The company has kept its 2019/2020 guidance unchanged with 3.7–4.0 Mwmt of iron ore sales at an all-in group cash cost of $70-$75/wmt FOB.

Mount Gibson Iron Limited

Consolidated quarterly operating and sales statistics for the 2018/19 financial year (Source: Company Reports)

On the stock information front

On October 21, 2019, MGX settled the day’s trade at $0.740, up 4.965%, with the market cap of ~$816.17 Mn. Its current PE multiple is at 5.880x. It has generated an absolute return of 48.42% for the last one year, -33.80% for the last six months, and -21.67% for the last three months.

BHP Group Limited (ASX: BHP)

BHP Group Limited (ASX: BHP) is involved in producing major commodities such as iron ore, metallurgical coal and copper. It has substantial interests in oil, gas and energy coal. Recently, the company published presentation for its annual general meeting 2019, where it highlighted that its assets are low cost, produce high quality products and have strong development potential. Under capital allocation framework, capex for FY2020 is expected to be below US$8 Bn. Its six major projects are under development. The company delivered strong FY19 result, where its EBITDA was reported at US$23 Bn at a margin of 53%. Its free cash flow for the period was reported at US$10 Bn. Its return on capital employed for the period was reported at 18%.

BHP Group LimitedFY19 Key Metrics (Source: Company Reports)

On the stock information front

On October 21, 2019, BHP settled the day’s trade at $34.980 up 0.546%, with the market cap of ~$102.49 Bn. Its current PE multiple is at 15.220x. It has generated an absolute return of 9.29% for the last one year, -9% for the last six months, and –15.39% for the last three months.

Rio Tinto Limited (ASX: RIO)

Rio Tinto Limited (ASX: RIO) is involved in minerals and metals exploration, development, production and processing and marketing. Recently, the company published its third quarter production results of FY19, where it highlighted that its Pilbara iron ore shipments for the period was reported at 86.1 Mn tonnes (100% basis), which were 5% higher than the previous corresponding period. This can be attributed to good recovery from the operational and weather challenges experienced during the initial phase of the year.

Bauxite production and shipments to third parties for the third quarter of FY 19 stood at 9% and 23% higher, respectively, as compared to the previous corresponding period. Aluminium production for the period was reported at 0.8 Mn tonnes, which was 3% lower than the previous corresponding period. This was due to preventive safety shutdown at one of the three pot-lines at ISAL in Iceland and earlier than planned pot relining at Kitimat in British Columbia, Canada.

Mined copper production for the third quarter of FY 19 was reported at 158 thousand tonnes, which is 3% lower than the previous corresponding period, but 15% higher than previous quarter. This was due to higher grades at Kennecott and improved throughput at Escondida.

Titanium dioxide slag production for the third quarter of FY 19 was reported at 321 thousand tonnes, which is 8% higher than the previous corresponding period. This was due to restart of furnaces and decent operational performance in 2019.

Production at Iron Ore company of Canada for the third quarter of FY 19 improved by 3% compared to the previous corresponding period and 17% higher than in the previous quarter. This was due to resumption in operations which got impacted due to flooding incident in June.

Guidance for bauxite production has been revised to ~54 Mn tonnes from previous 56 to 59 Mn tonnes and that for alumina production has been revised to ~7.7 Mn tonnes from 8.1 to 8.4 Mn tonnes.

Rio Tinto Limited

Operational Update (Source: Company Reports)

On the stock information front

On October 21, 2019, RIO settled the day’s trade at $88.120 up 0.285%, with the market cap of ~$32.62 Bn. Its current PE multiple is at 7.680x. It has generated an absolute return of 16.73% for

Fortescue Metals Group Ltd (ASX: FMG)

Fortescue Metals Group Ltd (ASX: FMG) is involved in exploration, development, production, processing and sale of iron ore. Recently the company informed the market that under agreement with Alinta Energy, FMG’s Chichester Hub iron ore operations will be powered by renewable energy. Once the 60 MW solar photovoltaic generation facility at the Chichester Hub is completed, 100% of daytime stationary energy requirements will be provided by the generated solar power. The remaining power requirement will be met through the integrated storage battery and a gas-based power station. This development will help the company to displace around 100 Mn litres of diesel annually and consequently reduce carbon footprint.

Fortescue Metals Group Ltd

Chichester Solar Gas Hybrid Project (Source: Company Reports)  

On the stock information front

On October 21, 2019, FMG settled the day’s trade at $8.320 up 0.362%, with the market cap of ~$25.52 Bn. Its current PE multiple is at 5.640x. It has generated an absolute return of 127.65% for the last one year, 18.75% for the last six months, and -4.16% for the last three months.

Grange Resources Limited (ASX: GRR)

Grange Resources Limited (ASX: GRR) is involved in the mining, processing and sale of iron ore; and the ongoing exploration, evaluation and development of mineral resources. Recently the company published its half yearly report for the period ended June 30, 2019. Revenues from ordinary activities for the period decreased by 20.6% from $189,310,000 in H1FY18 to $150,259,000 in H1FY19. Profit from ordinary activities after tax (before significant items) attributable to members decreased by 68% from $67,463,000 in H1FY18 to $21,518,000 in H1FY19. Net tangible asset backing per ordinary security increased from $0.38 in H1FY18 to $0.42 in H1FY19. Cash and cash equivalents and liquid investments at the end of the period was reported at $149.6 Mn, as compared to $204.5 Mn as on December 31, 2019. The Board of Directors declared final dividend (fully franked) of 1 cent per share, with record date and payment date on September 11, 2019 and September 27, 2019, respectively.

Grange Resources Limited

H1FY19 Income Statement (Source: Company Reports)

On the stock information front

On October 21, GRR settled the day’s trade at $0.220, with the market cap of ~$254.61 Mn. Its current PE multiple is at 3.780x. It has generated an absolute return of 7.32% for the last one year, -26.67% for the last six months, and -18.52% for the last three months.


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