Its always fun to to learn a little Latin, a language that has played a huge part in shaping the modern English we speak today. The Latin word for sword is ferrum, from which the atomic symbol Fe is derived. In terms of mass Fe, commonly known as iron, is our planet’s most abundant element.
The iron age may be long gone, but plenty of people are still amassing riches thanks to iron. Individual investors looking to own a company involved in production of the metal have a bevy of available options. Here are a few to consider:
A diversified brazilian
The largest producer of iron in the world is a Brazilian company by the name of Vale SA (ADR) (NYSE:VALE).. The company is also world’s second largest producer of nickel.
With operations also encompassing gold, silver, coal, copper, as well as potash and other fertilizer nutrients, this company is incredibly diversified. With the obvious exception of Antarctica, Vale SA (ADR) (NYSE:VALE) has employees on every continent.
Iron products as a percentage of total revenues have declined 1.9% since 2010, but iron is still definitely Vale’s main business. Sales of ore and pellets combined to equal 69.7% of its 2012 revenues. The company estimates it has a 23.8% market share of the global seaborne iron trade.
Vale SA (ADR) (NYSE:VALE) recently received a license from the Brazilian government for its Carajás S11D iron ore project. The project is the largest ever in the history of the iron industry. (Here’s a neat photo NASA took of the mine.)
Total capital expenditures for the project will total $19.671 billion, or almost one-third of the company’s current market cap. Once completed, the mine will have a capacity of 90 million metric tons, or mt, per year and contains proved reserves of 4.24 billion mt.
The company estimates a cash cost per ton of $15 for production at the mine. Over the past three years, Vale SA (ADR) (NYSE:VALE) has realized a historical three-year average price of $117.77 for iron ore of similar quality. The company expects the mine to be operating at full capacity by 2018.
An American iron and coal company
The company’s iron production takes place in three areas. In the United States it operates five mines in Michigan and Minnesota which accounted for 53.4% of 2012 production. It also operates mines in Eastern Canada which comprised 20.6% of 2012 production. Last but not least the company’s Koolyanobbing complex in western Australia was responsible for the final 26% of last year’s production.
Before iron can be utilized in a blast furnace it must be compressed in a process known as pelletizing. With 44.2% of total U.S. capacity, Cliffs Natural Resources Inc (NYSE:CLF) holds a dominant position among U.S. pellet producers.
One significant risk posed by investing in Cliffs Natural Resources Inc (NYSE:CLF) is the fact that it has a highly concentrated customer base. In 2012 sales to its top customer ArcelorMittal (ADR) (NYSE:MT) were 17% of revenues. Its top three customers composed 32% of its revenues. Although, to the company’s credit, this number is down from 41% in 2010.
Vale SA (ADR) (NYSE:VALE)’s customer base is not nearly as concentrated as Cliffs Natural Resources Inc (NYSE:CLF). Vale’s top 10 customers comprised 37% of its revenues, with no one customer accountable for more than 10%.
A beaten down giant
The world’s largest mining company BHP Billiton Limited (ADR) (NYSE:BHP) has gotten crushed lately. I don’t know when the carnage will stop, but I do see an opportunity for investors to pick up one of the world’s biggest and best companies for a bargain price. As the rest of the market gets frothier and frothier, BHP Billiton Limited (ADR) (NYSE:BHP) is getting cheaper and cheaper.
I could speculate about why the stock is going down. The SEC recently sent a letter to BHP Billiton Limited (ADR) (NYSE:BHP) inquiring about deliveries of alumina it delivered to Iran in 2010 and whether or not that alumina could be used for military purposes (of course, that was not the case). But postulating that as the reason for the stock being knocked down the stock is a bit of a stretch.
Perhaps a more likely reason would be that BHP Billiton Limited (ADR) (NYSE:BHP)‘s revenue and profits were down 14.1% and 55.8% respectively in the six months that ended in December of 2012. Ouch.
Still the company maintains that it has delivered solid performance in what are tough times for the commodity industry. One big positive I noticed was that BHP Billiton Limited (ADR) (NYSE:BHP) recently was able to erase its working capital deficit.
As for the company’s iron ore operations, its latest filings stated that the company’s production guidance of 183 million tons for fiscal 2013 remains unchanged.
However, while the company sees the global economy strengthening in 2013, it notes that demand for the metal will decelerate as the Chinese economy reaches maturity. Additionally many iron ore producers are taking steps to ramp up production, which will likely lead to lower realized prices for iron in the coming years.
Bottom line
Investors attempting to profit from the world’s most abundant metal have plenty of options available to them. While an increase in supply in the coming years coupled with an eventual deceleration of Chinese demand will not be positive for producers, the future still looks bright.
This paragraph came directly from Cliffs Natural Resources Inc (NYSE:CLF) most recent annual report:
“We continue to expect Chinese steel production to outpace the growth in Chinese iron ore production… Chinese iron ore, while abundant, is a lower grade containing less than half of the equivalent iron ore than the ore supplied by Australia and Brazil.”
To me that statement implies that Australian and Brazilian iron ore is of a higher grade than U.S. equivalents as well. For that reason, among others, I’m more bullish on Vale and BHP Billiton Limited (ADR) (NYSE:BHP) at the moment than I am on Cliffs Natural Resources Inc (NYSE:CLF).
Political and social turmoil in Brazil is hammering almost all stocks from that country right now, offering investors to buy certain companies at incredibly low prices. (Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) anyone?) In my opinion, the world’s largest iron ore producer is a solid investment at a current price of $12.59.
As for BHP, recent poor results have caused Wall Street to send the stock spiraling down. One of the world’s biggest and best companies yielding 4% with a P/E below 10? Yes please! Even JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc (NYSE:GS) are starting to become BHP bulls.
My opinions aside, I don’t think you can go wrong with any of these three. As the world economy presses onward and upward, so too shall these companies.
Fool blogger Ryan Palmer has no positions in any of the stocks mentioned. The Motley Fool does not recommend any of the stocks mentioned. The Motley Fool owns shares of Vale. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Investing in Earth’s Most Abundant Element originally appeared on Fool.com is written by Ryan Palmer.
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