Ride the Iron Ore Price With These Three Metals & Mining Stocks
This week, we use AAII’s A+ Investor Stock Grades to give you insights into three iron ore mining stocks benefiting from rising prices as stockpiles of this steelmaking ingredient decline. For investors focused on companies that supply one of the main ingredients for building the world’s infrastructure, iron ore mining stocks Cleveland-Cliffs Inc., Rio Tinto PLC and Vale SA may help build your portfolio.
V-Shaped Recovery for Steel Demand
Iron ore is one of the main ingredients used to produce steel. According to the U.S. Geological Survey (USGS), almost all iron ore (98%) is used in steelmaking. Iron ore is mined in nearly 50 countries, with the seven largest of these producing countries accounting for three-quarters of world production. Australia and Brazil are the two largest iron ore exporters (mostly to China), each with about one-third of total exports.
China is the largest importer and consumer of iron ore, so it is important to keep an eye on what is happening in this market. Weekly iron ore shipments from Australia have trended downward and there have been operational and safety issues limiting Brazil’s production and exports to China. These events have created a tight global supply-demand balance. As a result, iron ore prices have surged over the past few weeks in China as portside stockpiles have dropped to an eight-month low. Strong iron ore prices have carried over into global markets.
Iron ore is essential for the world’s iron and steel industries. Steel producers were negatively impacted by a freeze in consumption, economic shutdowns and disrupted supply chains during the coronavirus pandemic. However, the recovery in U.S. steel demand from pandemic lows exhibited a V-shaped recovery and steel prices entered 2021 at multi-year highs.
In addition, President Biden wants to spend billions on roads, bridges, airports, railways, sources of renewable energy, power grids and other major infrastructure projects and gained preliminary bipartisan support last week for his plans. If a large infrastructure spending bill passes, it would likely boost the sales and earnings for a variety of leading companies in the basic materials and industrials sectors.
Grading Iron Ore Mining Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is useful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three metals & mining stocks — Cleveland-Cliffs, Rio Tinto and Vale — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Iron Ore Mining Stocks
What the A+ Stock Grades Reveal
Cleveland-Cliffs (CLF) is a vertically integrated producer of iron ore and steel products. The company has upstream and downstream operations. It supplies both customized iron ore pellets and steel solutions. Cleveland-Cliffs is the largest flat-rolled steel company and the largest iron ore pellet producer in North America.
Its segments include steel and manufacturing and mining and pelletizing. Its steel and manufacturing segment is a producer of flat-rolled carbon, stainless and electrical steel products, primarily for the automotive, infrastructure and manufacturing and distributors and converters markets. The company’s steel and manufacturing segment includes subsidiaries that provide customer solutions with carbon and stainless-steel tubing products, engineered solutions, tool design and build, hot- and cold-stamped steel components and complex assemblies. Its mining and pelletizing segment is a supplier of iron ore pellets to the North American steel industry from its mines and pellet plants located in Michigan and Minnesota.
The company has significant exposure to harder-to-make steels and limited exposure to commodity steel products, such as hot-rolled coil. Since President Biden announced a tentative infrastructure deal, hot-rolled steel coil prices have more than tripled over the past year to reach an all-time high of over $1,800 per short ton this week.
Cleveland-Cliffs has a Value Grade of D, based on its score of 61, which is considered expensive. The company’s Value Score ranking is high across several traditional valuation metrics, with a score of 91 for shareholder yield, 69 for the price-to-book-value ratio and 61 for the enterprise-value-to-EBITDA (EV/EBITDA) ratio (remember, the lower the score the better for value). Successful stock investing involves buying low and selling high, so stock valuation is an important consideration for stock selection.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-earnings ratio, price-to-sales ratio and price-to-free-cash-flow ratio.
Cleveland-Cliffs has a Momentum Grade of A, based on its Momentum Score of 83. This means it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters.
Earnings estimate revisions offer an indication of what analysts are thinking about the short-term prospects of a firm. Cleveland-Cliffs’ Earnings Estimate Revisions Grade is C, which is considered neutral. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Cleveland-Cliffs has posted a positive and negative earnings surprise for its last two fiscal quarters, mainly due to higher realized iron ore and steel prices and higher integration costs due to its recent acquisitions of AK Steel and ArcelorMittal USA. These two acquisitions improved Cleveland-Cliffs’ competitive position in several markets, especially automotive. Over the last month, the consensus earnings estimate for the fiscal year ending December 31, 2021, has increased 17.1% from $4.09 per share to $4.79 per share; there have been six upward revisions to the fiscal-2021 estimate and one downward revision.
Rio Tinto (RIO) is a mining and metals company. The company’s business is finding, mining and processing mineral resources. The company’s segments include iron ore, aluminum, copper & diamonds, energy & minerals and other operations. The company operates an iron ore business, supplying the global seaborne iron ore trade. Its iron ore product operations are located in the Pilbara region of Western Australia and operations include approximately five iron ore products and approximately four port terminals.
The aluminum business includes bauxite mines, alumina refineries and aluminum smelters. Its bauxite mines are located in Australia, Brazil and Guinea. The copper & diamonds segment has managed operations in Australia, Canada, Mongolia and the U.S., and non-managed operations in Chile and Indonesia. The energy & minerals segment consists of mining, refining and marketing operations across sectors including borates, iron ore concentrate and pellets, titanium dioxide and uranium.
Rio Tinto has an average A+ Growth Grade of B. The growth grade considers both the near- and longer-term historical growth in revenue, earnings per share and operating cash flow.
The company has exhibited strong sales growth over the past year. Sales increased 22.5% year over year for the six-month period ending December 31, 2020, to $25.2 billion, while operating cash grew over 55%. Rio Tinto currently has a 5.5% dividend yield.
The company has a Momentum Grade of C, based on its Momentum Score of 48.
Vale (VALE) is a global producer of iron ore and iron ore pellets, key raw materials for steelmaking, and producer of nickel. The company also produces copper, metallurgical and thermal coal, potash, phosphates and other fertilizer nutrients, manganese ore, ferroalloys, platinum group metals, gold, silver and cobalt. The company’s segments include ferrous minerals, comprising the production and extraction of ferrous minerals such as iron ore fines and iron ore pellets and their logistic services, and manganese and ferroalloys and others ferrous products and services; coal, comprising the extraction of metallurgical and thermal coal and its logistic services; base metals, which include the production and extraction of non-ferrous minerals and are presented as nickel and its byproducts; and copper (copper concentrated); and others, comprising sales and expenses of other products, services and investments in joint ventures and associated in other business.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Vale has a Quality Grade of A, putting it in the top tier among all U.S.-listed stocks. The company ranks highly in terms of its return on assets and F-Score, ranking respectively in the 91st and 95th percentile of all U.S.-listed stocks. However, it ranks poorly in terms of its change in total liabilities to assets, in the 40th percentile.
Vale has a Momentum Grade of B, based on its Momentum Score of 77, and an average Growth Grade of A. Vale currently has an 8.4% dividend yield.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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