The share prices of iron ore miner stocks are pricing in much higher iron ore prices that the market is delivering, suggesting the sector could see significant downside ahead.
Axiom analyst Gordon Johnson recently derived implied iron ore prices using the current share prices of five of the world’s largest iron ore producers and now believes expectations are so high that there is a major opportunity for short sellers in the space.
Johnson started with the net debt balances to market caps of Rio Tinto plc (ADR) RIO 0.83%, Fortescue Metals Group Limited, BHP Billiton Limited (ADR) BHP 0.73%, Vale SA (ADR) VALE 0.11%and Cliffs Natural Resources Inc CLF 1.05%, derived enterprise values for each, estimated total EBITDA using Bloomberg consensus estimates, and then removed all other EBITDA sources other than iron ore sales. Johnson could then single out expected profit per ton of ore, which could be used to determine implied spot price.
Johnson found that the five stocks are currently pricing in a 62 percent Fe ore price of about $65/t, roughly 22 percent above current market price. The difference between the current ore price of $53.40/t and the implied $65/t implied price that Johnson calculated is statistically significant, he said.
“Resultantly, barring a big, sustained reversion higher in iron ore prices, we argue the time is ripe to add to short positions in FMG, CLF & RIO,” Johnson wrote on Wednesday.
In addition to the three stocks mentioned as short ideas, Axiom has…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
