How to pick good iron ore stocks?

Iron-rich rocks are found globally, but ore-grade commercial deposits are present in a few countries only. Australia, Brazil, China, and India are among the leading iron ore producers in the world. Currently, China is the world’s leading consumer of iron ore, accounting for nearly 57% of the global consumption, as per the Resources and Energy Quarterly March 2021.

The Asian country increased its total iron ore imports by 6% to 444.89Mt in the first five months of 2021. There are three primary ways through which investors can park their funds in iron ore. One of the methods is through making investments in an iron ore company, which is engaged in the extraction of iron ore.

Another option to invest in iron ore is to buy the shares of an integrated steel company, which gives access to both iron ore and steel industries to the investor. The third option is an exchange-traded fund (ETF), which is focused on holding the stocks of the companies producing iron ore. However, there are not many ETFs that extensively focus on iron ore.

The investor must look for the company's total iron ore reserves and its market value. Reserves are evaluated by feasibility studies, which are used to verify the worth of deposits. A feasibility study accounts for the estimated size and grade of a deposit by subtracting the costs of extraction. Dividend-paying companies are relatively more stable.

However, sometimes higher dividends mean that the company is not investing much in the business. A company can temporarily cut dividends due to economic downturns, but that doesn't mean that the business is in jeopardy, rather it may require more money to pay instant expenses.

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