Steel is made from iron ore, which is one of its key constituents. According to the United States Geological Survey (USGS), almost all iron ore (98 percent) is utilized in steelmaking.
Nearly 50 countries mine iron ore, with the top seven producing countries accounting for three-quarters of global production. The two largest iron ore exporters (mainly to China) are Australia and Brazil. Each accounts for over one-third of total exports.
Since China is the world’s largest importer and consumer of iron ore, keeping an eye on what’s happening there is crucial. Weekly iron ore shipments from Australia have been declining, and operational and safety difficulties have hampered Brazil’s output and exports to China. These occurrences have resulted in a tight worldwide supply-demand equilibrium. As a result, iron ore prices have risen in China in recent weeks, with portside stockpiles falling to an eight-month low. Iron ore prices have risen sharply, affecting worldwide markets.
Iron ore is necessary for the iron and steel industries around the world. During the coronavirus pandemic, steel companies were harmed by a freeze in consumption, economic shutdowns, and interrupted supply lines. However, the rebound in US steel demand from epidemic lows followed a V-shaped pattern, with steel prices reaching multi-year highs in 2021.
Furthermore, President Biden wants to spend billions on roads, bridges, airports, railroads, renewable energy sources, power grids, and other big infrastructure projects. His ideas have received early bipartisan backing. If a significant infrastructure bill passes, it will almost certainly enhance sales and earnings for several major corporations in the basic materials and industrials sectors.
Using AAII’s A+ Stock Grades to grade iron ore mining stocks
When examining a business, having an objective framework that allows you to compare organizations is beneficial. This is one of the reasons the American Association of Individual Investors (AAII) developed the A+ Stock Grades. It ranks firms based on five criteria, i.e., value, growth, momentum, earnings estimate revisions (and surprises), and quality, that have been demonstrated to identify market-beating stocks over time.
The following table evaluates the desirability of three metals and mining stocks—Cleveland-Cliffs, Rio Tinto, and Vale—based on their fundamentals, using AAII’s A+ Stock Grades.
What A+ Stock Grades indicate
Cleveland-Cliffs: Cleveland-Cliffs is an iron ore and steel company with a vertically integrated business model. The business operates both upstream and downstream. It offers customized iron ore pellets as well as steel solutions.
Cleveland-Cliffs is North America’s largest flat-rolled steel manufacturer and iron ore pellet producer.
Steel and manufacturing, as well as mining and pelletizing, are among the company’s segments. The steel and manufacturing section of the corporation includes subsidiaries that offer carbon and stainless steel tubing, engineered solutions, tool design and build, hot- and cold-stamped steel components, and complicated assemblies to customers. From its mines and pellet factories in Michigan and Minnesota, the company’s mining and pelletizing sector supplies iron ore pellets to the steel industry in North America.
The company has extensive experience with harder-to-make steels and with commodity steel products like a hot-rolled coil. The price of hot-rolled steel coils has more than tripled in the last year since President Biden proposed a tentative infrastructure plan, reaching an all-time high of almost $1,800 per short ton.
Cleveland-Cliffs has a Value Grade of D, indicating that it is pricey, based on its score of 61. With a score of 91 for shareholder yield, 61 for the enterprise-value-to-Ebitda (EV/Ebitda) ratio, and 69 for the price-to-book-value ratio, the company’s Value Score is robust across multiple traditional valuations indicators. Stock valuation is crucial for stock selection since successful stock investing requires buying low and selling high.
The Value Grade averages the percentile ranks of the above-mentioned valuation indicators and the price-earnings ratio, price-to-sales ratio, and price-to-free-cash-flow ratio.
Based on its Momentum Score of 83, Cleveland-Cliffs receives an A Momentum Grade. This indicates it has outperformed all other equities in weighted relative strength over the last four quarters. The relative price variation for each of the previous four quarters is used to calculate the weighted four-quarter relative strength rank.
Earnings estimate revisions provide insight into what analysts think about a company’s short-term prospects. The Earnings Estimate Revisions Grade for Cleveland-Cliffs is a C, which is considered neutral. The grade is based on the statistical importance of its last two quarterly earnings surprises, as well as the percentage change in its current fiscal year consensus forecast over the previous month and past three months.
Cleveland-Cliffs’ last two fiscal quarters had both good and negative earnings surprises, owing to higher realised iron ore and steel prices, as well as greater integration expenses from its recent acquisitions of AK Steel and ArcelorMittal USA. These two acquisitions boosted Cleveland-Cliffs’ competitiveness in several areas. The consensus profits estimate for the fiscal year ending December 31, 2021, has risen 17.1 percent from $4.09 per share to $4.79 per share.
There have been six positive revisions and one downward revision to the fiscal-2021 estimate.
Rio Tinto: Rio Tinto operates in the mining and metals industries. Mineral resources are discovered, mined, and processed by the corporation. Iron ore, aluminum, energy & minerals, copper & diamonds, and other businesses are among the company’s segments. The corporation is in the iron ore sector, serving the global iron ore trade by sea. Its iron ore product operations are based in Western Australia’s Pilbara area, and it operates about five iron ore products and four port terminals.
Bauxite mining, alumina refineries, and aluminum smelters are all part of its aluminum business. While the company’s bauxite mines are in Australia, Brazil, and Guinea, Copper and diamonds operations are handled in Australia, Canada, Mongolia, and the United States, with non-managed operations in Chile and Indonesia. The energy & minerals division consists of mining, refining, and marketing operations across sectors, including borates, titanium dioxide, iron ore concentrate and pellets, and uranium.
Rio Tinto has an A+ Growth Grade of B on average. The growth grade considers short-term and long-term revenue, profits per share, and operating cash flow growth.
Over the last year, the company has had remarkable sales growth. Sales jumped 22.5 percent year-over-year to $25.2 billion in the six months ended December 31, 2020, while operating cash increased over 55 percent. Rio Tinto’s dividend yield is at 5.5 percent.
Based on its Momentum Score of 48, the company earns a Momentum Grade of C.
Vale: Vale is a leading producer of iron ore and iron ore pellets, both critical raw materials for steelmaking and a nickel producer. Copper, metallurgical and thermal coal, phosphates, potash, and other fertilizer ingredients, manganese ore, ferroalloys, platinum group metals, gold, silver, and cobalt are among the company’s other products.
A higher-quality stock has characteristics that are linked to higher upside potential and lower downside risk. Backtesting of the quality grade reveals that, on average, companies with higher quality grades outperformed equities with lower grades from 1998 to 2019.
The average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), buyback yield, gross profit to assets, change in total liabilities to assets, accruals, Z double prime bankruptcy risk (Z) score, and F-Score yields the A+ Quality Grade. The score is flexible, which means it can take all eight measures or only the valid remaining measures if any of the eight are invalid. Stocks must have a valid measure and related rating for at least four of the eight quality measures to be granted a quality score.
Vale has a Quality Grade of A, ranking it among the top of all publicly traded equities in the United States. In terms of return on assets and F-Score, the company is in the 91st and 95th percentiles of all listed stocks in the US, respectively. However, it is in the 40th percentile regarding the shift in total liabilities to assets.
Vale has a Momentum Grade of B and an average Growth Grade of A, based on its Momentum Score of 77. The current dividend yield for Vale is 8.4 percent.
The stocks that meet the approach’s criteria do not represent a “recommended” or “buy” list. Performing due diligence is crucial.