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Implications of High Iron Ore Prices for BHP, RIO & FMG

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

The price of iron ore is currently around $US120 per tonne. This compares with the price of around $US40 per tonne in 2016, the most recent low point.

iron-ore

This significant recovery in the price of iron ore over the last few years (and particularly in 2019) reflects continued strength of Chinese demand and problems with tailing dams in Brazil causing Brazilian production of iron ore to fall significantly. The current iron ore price also reflects that the Australian producers are unable to increase supply in the short term without significant capital investment. Further, the timing of a recovery of Brazilian iron ore production remains highly uncertain. This suggests that the recent strength of the iron ore price could continue for some time.

In 2011, the price of iron ore peaked at around $US185 per tonne. This was at a time where the $US/$A exchange rate was around parity. Currently, the $US/$A exchange rate is 0.70. Consequently, in Australian dollar terms, the iron ore price is currently close to the peak in 2011.

In recent years, BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) have conducted capital management activities recently in light of the strong commodity prices, sale of under-performing assets and a preference to hand back surplus capital and franking credits to shareholders.

In December 2018, BHP undertook an off-market buy back of BHP shares ($US5.2 billion). This was followed by a special dividend to BHP shareholders in January 2019 ($US5.2 billion).

In February 2019, Rio Tinto commenced an on-market buy back of $US1.1 billion, to be completed no later than February 2020. Rio Tinto also conducted buy backs in 2018 and 2017. Further, Rio Tinto paid a special dividend of $US2.43 per share in April 2019.

In addition, Fortescue Metals (ASX: FMG) has paid two special dividend in FY19. The first was $A0.11 per share in April 2019 and second was A$0.60 per share in June 2019. This is the first time Fortescue Metals has undertaken capital management activities (other than buying back debt).

The question arises whether the continuing high iron ore price provides further capacity for BHP, Rio Tinto and Fortescue Metals to undertake additional capital management activities in the second half of 2019. This will be closely monitored when the FY19 financial results of these companies are released in August 2019.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute "research" as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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