Investors aren’t giving up on mining stocks, even as the price of iron ore continues to tumble.
The price of Australia’s biggest export sank another 4.6 per cent to $US63.20 a tonne on Wednesday, as speculators in China bet the raw materials market is about to be swamped with high-quality ore.
But many Australian fund managers are viewing the dramatic drop in the price of 62 per cent ferrous and corresponding fall in mining shares as a prime opportunity to buy into the sector.
On Wednesday, resource giants BHP Billiton and Rio Tinto were trading 0.2 per cent and 1.2 per cent higher respectively at lunch time while Fortescue Metals was up 3.7 per cent.
“At these prices, we think the miners are looking demonstrably cheap,” said Garth Rossler, chief investment officer at Maple-Brown Abbott, who has been topping up on mining stocks for some time.
“While there is plenty of volatility in the iron ore price, nobody thought the previous highs of $US80 a tonne was sustainable, so if there is selling in the majors, we’re prepared to pick them up.”
The 33 per cent fall in iron-ore prices from a mid-February peak has seen Rio Tinto fall 15.4 per cent, while main rival BHP Billiton is off 10.5 per cent.
“So while the stocks have come off a little bit, they are still well off their lows,” said Mr Rossler.
Tribeca Capital’s Ben Cleary says the price of iron ore is likely to stabilise around current levels and the fund is covering shorts in that space.
“We think there’s likely to be an inventory destock and that Chinese fiscal stimulus will be very strong in the second quarter,” said Mr Cleary.
The key to scooping up a bargain, says Frank Villante, chief investment officer at Celeste Investment Management, is to find a position on the cost curve in the bottom quartile.
“Basically take a view that says, your c1 cost is $15 a tonne and your c3 cost is $30 a tonne. Then take a view that in the medium to longer term, the price is going to do what it has done historically, in recent history anyway.
“Then you try and find the companies in the cost curve who are going to survive almost irrespective of price environment.”
Mr Villante also points to periphery stocks that may be swept up in the broad market sell-off but ultimately benefit from continued support from the major miners.
Lycopodium and Monadelphous are both ASX-listed engineering services companies and have solid work booked in providing critical infrastructure to the likes of BHP, Rio and Fortescue.
“With the position on the cost curve and the customers these guys have, they’re still making really good dough at current price points,” said Mr Villante.
However the iron ore price might still have further to fall, as Brazilian producer Vale prepares to report production of around 84.7 million metric tonnes for the first three months of the year, according to Bloomberg.
The world’s biggest producer is ramping up output to compete with Australian mines, which are closer to China.
The global iron ore surplus was 70 million tonnes last year and that will probably increase by an additional 90 million tonnes this year, according to Citigroup, which this week flagged more production from Brazil, Australia, China and India.