Australia is blessed with some of the best iron ore deposits in the world. Rio Tinto (ASX: RIO) is our largest producer of iron ore. Last year 88% of Rio Tinto’s earnings came from iron. Next in production size is BHP Billiton (ASX: BHP), whose share of last year’s earnings from iron was 50%. Fortescue Metals Group (ASX: FMG) is next, then Mt Gibson (ASX: MGX), and finally Atlas Iron (ASX: AGO). The last three of those are pure plays.
In terms of market capitalization, BHP, Rio and Fortescue are whales with values of $117 billion, $28 billion, and $16 billion, respectively. Mt Gibson and Atlas are much smaller, weighing in in at about $1 billion each. On this basis, Rio seems cheap comparatively.
Looking at the return on equity for the year ending June 2013, there are some interesting figures. Fortescue came out top with 29.1%, followed by Rio at 19.8% and BHP at 16.7%. Mt Gibson and Atlas crawled in at 7.9% and 1%, respectively, but we should note that Mt Gibson and Atlas are on a sharp growth curve, making future years supposedly very different.
When it comes to cost of production, both BHP and Rio are below $50 per tonne, while the others are significantly above that figure. Currently selling at over $130 per tonne, the price of iron ore has a long way to drop before any of these five companies is under water, but that can happen.
Note that figures quoted in circulated articles may be for the marginal cost of production, not taking into account infrastructure costs. A fairer comparison might be to use average overall cost, but such figures are not so readily available. Thus a comparison on marginal cost is useful but does not reveal the full picture.
The one factor all these companies have in common is the price of the commodity, although there are variations depending on grade and impurity. Note that an ore may be subject to impurities and the presence of these affects steel making, which in turn affects price of the ore. Assuming price is the same for all, comparison of the stocks depends on costs and risks.
Having more than one set of criteria is useful in making an overall comparison. There are always many assumptions and risks to be considered, and accordingly these stocks are ranked differently for various sets of criteria. Of course, BHP is the most diversified, followed by Rio, meaning, that in the event of a major collapse in iron ore prices, these two see a relatively lower impact, with BHP a bit safer as it is the most diversified. However, in my opinion, the risk of a major price collapse is unlikely in the foreseeable future.
Source: Motley Fool