Iron ore stocks have come under immense pressure over the past month amid the U.S.-China trade war finding another gear and the commodity's price slumping to a three-month low. The steelmaking ingredient's price dropped 22% last week after China reiterated a cautious tone on stimulating its economy, saying that it would continue a targeted approach to facilitating growth in the world's biggest steel consumer.
Despite these challenges, The Goldman Sachs Group, Inc. (GS) remains more upbeat on iron ore prices due to slower production growth from Vale S.A. (VALE), Rio Tinto Group (RIO), and BHP Group (BHP), as well as robust Chinese steel output, according to a recent Barron's story. The New York investment bank sees prices recovering from around $90 to $115 per ton in three months.
Those who want to position for rising iron ore prices over the short term to midterm should consider these three mining giants that control 66% of seaborne trade in the commodity – that is, iron ore shipped to other countries. Let's review each company in more detail and discuss possible trading opportunities.
Vale S.A. (VALE)
Vale, the world's largest iron ore miner, produces and markets iron ore and iron ore pellets for use as raw materials in steelmaking. Vale also provides related logistic services. The Rio de Janeiro-based company posted a second quarter (Q2) loss of three cents per share, falling well short of a consensus earnings estimate of 58 cents per share. Although the mining giant also missed revenue forecasts, the top line grew 9% on a year-over-year basis. The company continues to recover from a rupture of its Brumadinho dam and the decommissioning of Germano dam and the Renova Foundation. Vale stock has a market capitalization of $60 billion and is trading down 11.30% on the year, underperforming the industrial metals and materials industry average by 16.35% over the same period as of Aug. 14, 2019.
Vale shares have oscillated within a broad four-point range for the first eight months of 2019. The stock's recent sharp decline found support from the May swing low in Tuesday's trading session, rallying nearly 4% from the area. The relative strength index (RSI) also moved out of oversold territory, providing ample room for the price to add further upside. Traders who buy the stock should look for a retest of crucial resistance at $13.75 and position a stop-loss order beneath the Aug. 12 low at $11.19. The trade offers a risk/reward ratio of 1:3.94 ($2.05 profit target/$0.52 stop loss), assuming a fill at yesterday's $11.70 closing price.
Rio Tinto Group (RIO)
With a market cap of $84.13 billion, Rio Tinto engages in locating, mining, and processing mineral resources globally. The Anglo-Australian miner primarily concentrates on iron ore, but it also has interests in aluminum, copper, diamonds, energy products, gold, and industrial minerals. Amid challenging conditions, Rio Tinto delivered impressive first-half results, with earnings coming in at $4.93 billion versus expectations of $4.86 billion. Revenue for the period came in at $29.7 billion, increasing 9% from the year-ago figure. The company also announced that it would return $3.5 billion to shareholders through an interim dividend of $1.51 per share ($2.5 billion) and a special dividend of 61 cents per share ($1 billion). However, Rio's latest quarterly production report showed that iron ore production was down 7% on the June quarter of 2018. As of Aug. 14, 2019, Rio stock yields 6.19% and has returned 16.28% year to date (YTD).
The miner's share price added most of its YTD gain between January and April. Over the next three months, the shares traded sideways before retracing below the 200-day simple moving average (SMA) in early August. Price has stabilized at the $50 level, finding support from a February pennant pattern. Those who intend to swing trade the stock should set a profit target around $56 – an area where the price may encounter resistance from the July 24 gap – caused by analysts predicting that iron ore prices had reached their peak. Protect downside by placing a stop under the July $48.72 low.
BHP Group (BHP)
BHP operates as a diversified miner with interest in iron ore, copper, oil, gas, and coal. The $129.66 billion company's significant assets include Pilbara iron ore, Queensland coking coal, Escondida copper, and conventional petroleum assets, primarily located in Australia and the Gulf of Mexico. The miner's iron ore output fell to 71 million tons during the June quarter (Q4), compared with 72 million tons a year earlier. For the fiscal year ending June 2019, the diversified mining giant is expected to post earnings per share of $3.84 when it reports results on Tuesday, Aug. 20, representing a 14.3% jump from the year-ago reported number. Analysts have increased bottom-line estimates by 4.1% over the past three months, indicating improving sentiment toward the company. BHP stock issues a 4.76% dividend yield and has gained 11.39% YTD as of Aug. 14, 2019.
Since setting a 52-week high on July 2, BHP's share price has retraced to the $50 level, where the stock finds a support zone from the February countertrend low, the May swing low, and the 200-day SMA. A 2.24% bounce from this level yesterday on above-average volume may trigger further buying in subsequent trading sessions. Those who take an entry could scale out of half the position near overhead resistance at $54, while exiting the remaining half close to the 2019 high at $59.02. Think about cutting losses if price closes beneath the Aug. 7 slow at $48.94.