Despite a colossal 2021 where miners paid out record dividends, the Fortescue share price has plummeted 7% today.
Similarly, Australia’s largest public company BHP Group Ltd (ASX: BHP) is down 31% from its all-time high.
The Rio Tinto Limited (ASX: RIO) share price is also falling, down 19% for the year.
What’s going on with the big iron ore miners?
Iron ore or iron no more?
The iron ore price has taken a battering over the past few weeks. From a high of US$230 per tonne to now sitting around US$125 per tonne.
Several factors have led to the price drop including:
- China ordering steel producers to reduce output in order to curb carbon emissions
- The Winter Olympics in February means winding down of industries to minimise pollution – the same was done in 2016 for the Beijing Summer Olympics
- The collapse of Evergrande, China’s second-largest property developer
- The world’s largest iron ore producer Vale located in Brazil ramping up supply
- Ongoing bilateral tensions between the Chinese and Australian governments
It’s worth noting however that the iron ore price was trading around US$100 per tonne prior to the pandemic. So the recent tumble is more a reflection of a return to the mean rather than any drastic change in conditions.
If anything, the iron ore price above US$230 was a result of abnormal demand, as China looked to stimulate its economy.
Investors big payday
Another factor impacting the big iron ore businesses share prices is the mega dividends in 2021.
Fortescue paid $3.58 per share, BHP $4.00 per share and Rio $7.23 per share. Keep in mind all these dividends are fully franked as well.
Investors may be choosing to capitalise on the dividends and reallocate capital elsewhere. Mining is a cyclical industry.
You want to be a buyer at the bottom and a seller at the top.
My take
Fortescue, BHP and Rio are low-cost iron ore producers. It costs no more than $20 per tonne for each of them to dig iron ore out of the ground.
At $125, that is still a very healthy profit margin.
I don’t have an informed view of the iron price. However, my preferred mining exposure is Deterra Royalties Ltd (ASX: DRR).
It earns a royalty over Mining Area C in the Pilbara, provides exploration upside without the cost and relatively stable cash flows.
You can find more about the business and why I think it’s a great dividend share here.
