Strengthen Your Portfolio With These Three Iron Ore Stocks
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three iron ore stocks. With economic uncertainty and coronavirus outbreaks in China, should you consider the stocks of Cleveland-Cliffs Inc. (CLF), Rio Tinto PLC (RIO) and Vale S.A. (VALE)?
Iron Ore Stocks Recent News
The iron ore industry has experienced significant volatility since 2020. Prices peaked in July 2021 at nearly $225 per ton. Since then, prices have fallen over 50%. A lot of this volatility is due to the war in Ukraine and China’s reliance on iron ore.
China is the world’s largest consumer of iron ore. Despite being the third-largest producer, it still imports around 80% of the iron ore it uses each year. The biggest producers of iron ore are Australia, Brazil and China, which collectively account for around two-thirds of global output.
The property crisis in China is a significant factor in faltering iron ore prices. In 2021, China’s largest real estate developer, Evergrande, began to collapse. Dozens of other developers also missed debt payments, the sale of new homes plunged and construction cranes have come to a standstill at many sites. With construction coming to an abrupt halt, demand for iron ore dropped significantly.
China has attempted to fix this crisis. China’s large state-owned banks pledged at least $180 billion (converted from yuan to November 30 U.S. dollars) in fresh credit to developers following a raft of measures to ease the property crisis. The steps came on top of regulatory measures to reduce a stifling cash crunch in the industry.
Despite this, there has been concern coming out of China due to numerous coronavirus flare-ups. Daily cases reached a new high, and China’s “zero-COVID” policy has led to unrest. There have been four days of demonstrations against Beijing’s “zero-COVID” policy, which have spread across China with little sign of fading. As a result, the cash relief provided by Chinese creditors could have less of a positive impact on iron ore as previously expected.
Grading Iron Ore Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results 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 iron ore stocks — Cleveland-Cliffs, Rio Tinto and Vale — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Iron Ore Stocks
What the A+ Stock Grades Reveal
Cleveland-Cliffs Inc. (CLF) is an integrated mining and flat-rolled steel producer. It manufactures iron ore pellets. It is vertically integrated from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubing. It offers advanced high-strength steel, hot-dipped galvanized, aluminized, galvalume, electrogalvanized, galvanneal, hot-rolled coil, cold-rolled coil, plate, tinplate, grain-oriented electrical steel (GOES), non-oriented electrical steel (NOES), stainless steel, tool and die, stamped components, rail, slab and cast ingot. It provides steel solutions, such as operations of tooling and stamping, which provides advanced-engineered solutions, tool design and build, hot and cold-stamped components and complex assemblies for the automotive market. It serves various markets, such as automotive, infrastructure and manufacturing, steel producers, as well as distributors and converters.
The company has a Value Grade of A, based on its Value Score of 92, which is considered to be deep value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
Cleveland-Cliffs’ Value Score ranking is based on several traditional valuation metrics. The company has a rank of 10 for the price-to-free-cash-flow (P/FCF) ratio, nine for the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) and five for the price-earnings (P/E) ratio (with the higher the rank being better for value). The company has a price-to-free-cash-flow ratio of 3.9, an enterprise-value-to-EBITDA ratio of 2.6 and a price-earnings ratio of 3.4. The company has a price-to-sales (P/S) ratio of 0.35, which translates to a rank of 13.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with shareholder yield and the price-to-book-value (P/B) ratio. The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Cleveland-Cliffs has an Earnings Estimate Revisions Grade of F, which is very negative. The grade is based on the statistical significance of its latest 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 reported an earnings surprise of –47.1% for third-quarter 2022, and in the prior quarter reported an earnings surprise of –14.1%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from a loss of $0.191 to a loss of $0.297 per share due to five downward revisions. Over the last three months, the consensus earnings estimate for full-year 2022 has decreased 12.3% from $3.304 to $2.896 per share due to five downward revisions.
Cleveland-Cliffs has a Quality Grade of A with a score of 84. The company ranks strongly in terms of its return on assets (ROA) and change in total liabilities to assets. The company has a return on assets of 12.4% and a change in total liabilities to assets of –7.1%. The industry average return on assets is 3.3%, well below Cleveland-Cliffs.
Rio Tinto PLC (RIO) is a U.K.-based mining and metals company. Its segments include iron ore, aluminum, copper and minerals. It operates an integrated portfolio of iron ore assets, which includes a network of 17 mines, four independent port terminals and a rail network spanning approximately 2,000 kilometers. The aluminum business includes bauxite mines, alumina refineries and aluminum smelters. Its bauxite mines are located in Australia, Brazil and Guinea. The copper segment is engaged in mining and refining copper, gold, silver, molybdenum and other byproducts. The minerals segment includes businesses with products — such as borates and titanium dioxide feedstock — together with the Iron Ore Company of Canada (IOC). It also includes diamond mining, sorting and marketing and lithium exploration.
Rio Tinto has a Momentum Grade of A, based on its Momentum Score of 83. This means that it is above average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 11.8% in the most recent quarter, 0.0% in the third-most-recent quarter and 37.3% in the fourth-most-recent quarter, offset by a below-average relative price strength of –20.9% in the second-most-recent quarter. The scores are 81, 22, 56 and 95 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 8.0%, which translates to a score of 83. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Rio Tinto has a Quality Grade of A with a score of 89. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets, return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The Quality 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.
The company ranks strongly in terms of its F-Score, Z-Score and return on assets. Rio Tinto has an F-Score of 6, a Z-Score of 7.98 and a return on assets of 17.4%. The sector median F-Score and Z-Score are 4 and 6.43, respectively. However, Rio Tinto ranks poorly in terms of its change in total liabilities to assets, in the 35th percentile.
The company has a Value Grade of A, based on its Value Score of 86, which is considered to be deep value. This is derived from a very high shareholder yield of 10.3% and a price-earnings ratio of 6.1, which rank in the sixth and 14th percentiles, respectively. Rio Tinto has a Growth Grade of A based on a score of 94. The company has had strong year-over-year sales increases over the last five years.
Vale S.A. (VALE), formerly Companhia Vale do Rio Doce, is a Brazil-based metal and mining company, which is primarily engaged in producing iron ore and nickel. It also produces iron ore pellets, copper, platinum group metals (PGMs), gold, silver and cobalt. Vale is engaged in greenfield mineral exploration in five countries and operates logistics systems in Brazil and other regions in the world, including railroads, maritime terminals and ports, which are integrated with mining operations. In addition, Vale has distribution centers to support the delivery of iron ore worldwide. Vale has numerous subsidiaries, including Vale Logistica Uruguay S.A., Vale Holdings B.V. and Vale Overseas Ltd. The company’s operations abroad cover approximately 30 countries.
Vale has a Quality Grade of A with a score of 93. The company ranks strongly in terms of its buyback yield, return on assets and change in total liabilities to assets. Vale has a buyback yield of 10.5%, a return on assets of 23.5% and a change in total liabilities to assets of –8.0%.
Vale has a Momentum Grade of A, based on its Momentum Score of 92. This means that it is well above average in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is 13.9%.
The company reported a positive earnings surprise for third-quarter 2022 of 74.7%, and in the prior quarter reported a positive earnings surprise of 63.0%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $0.663 to $0.514 per share due to seven downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has decreased 1.5% from $3.488 to $3.434 per share, based on six upward and three downward revisions.
The company has a Value Grade of A, based on its Value Score of 90, which is deep value. This is derived from a low price-earnings ratio of 3.5, a low enterprise-value-to-EBITDA ratio of 3.0 and a shareholder yield of 19.8%, which rank in the fifth, 11th and second percentiles, respectively. Vale has a Growth Grade of A based on a score of 82. The company has had strong year-over-year sales increases over the past five years.
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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