The iron ore spot price continues to go from strength to strength, topping US$100 per tonne for the first time this year. China’s iron ore futures market opened more than 6% higher on Monday after top miner Vale SA was ordered to shut operations at a site that accounts for approximately 10% of its output.
Could supply woes make the Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and BHP Group Ltd (ASX: BHP) share prices a buy?
Vale SA to close multiple sites
The Australian Financial Review (AFR) reports that a Brazilian labor court judge ordered Vale SA to close multiple sites after a COVID-19 outbreak among workers.
Investors may remember Vale’s tailings dam collapse in late January 2019. This tragic incident killed 237, left 33 missing and nearly 1,000 displaced. The closure of this mine site resulted in significant supply woes for the global iron ore market. This supply imbalance caused the iron ore spot price to soar from ~US$70 to more than US$120 per tonne in July 2019. This also saw the Rio Tinto, Fortescue and BHP share prices hit record highs or price levels not seen since the GFC.
Australia is the largest iron ore producing country in the world and is also fortunate enough to have largely tackled the spread of the coronavirus. However, other producers that play a vital role in the iron ore supply chain such as Brazil, Russia and India are still at various stages of the curve and ranked 2nd, 4th and 5th, respectively, for active cases globally. This is likely to see an impact on various parts of their economies, including mining.
Aussie miners to benefit
The Rio Tinto, Fortescue and BHP share prices are likely to continue to push higher following strong spot prices. Elevated iron ore prices will continue to support the market-leading dividends paid by Aussie miners. At the time of writing, Rio Tinto currently pays a dividend yield of 5.77%, BHP pays 5.87% and Fortescue pays 6.88%.
From a risk/reward perspective, it may be challenging for investors to buy Fortescue at its current record all-time high prices. Alternatively, I believe it is feasible for the Rio Tinto and BHP share prices to revisit their previous highs. This can be further supported by the swift recovery of other commodities such as copper, coal and oil that make up a small proportion of the ASX 200 miners’ materials portfolios.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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