Seeing Upside in Iron-Ore Miners – by Diana Kinch (Wall Street Journal – July 25, 2013)

Some Investors Say Stocks Have Fallen Too Far, and News Isn’t All Bad

LONDON—Mining stocks are among the worst performers this year, with those exposed to iron ore down sharply amid concerns about overcapacity and sluggish demand from China. But some investors believe the rout could be overdone, with share prices of miners falling much further than market prices for iron ore.

“Right now, we’re moving into the low and everyone’s twitchy; the market’s focused on the third quarter, when we’ll have shutdowns in the Chinese steel industry and a seasonal downwards [move],” said Clive Burstow, manager of Barings’ Global Mining Fund, which holds some $15 million in mining stocks.

Capacity to produce iron ore is set to boom in the next few years as expansion programs planned before the financial crisis start to come on stream. By 2018 there will be an extra 419 million tons of capacity, according to estimates compiled from producers’ data, around 40% above 2012’s seaborne traded levels of just over one billion tons.

About half of the new capacity is expected to come on stream by late 2015, including from new projects by Rio Tinto RIO.LN +0.17% PLC and BHP Billiton PLC in Australia, and from Vale SA VALE5.BR -0.31% in Brazil.

Last week both Rio Tinto and BHP Billiton reported record output of the steelmaking raw material partly because of new projects.

The new capacity comes at a time when analysts believe demand from China, the world’s largest consumer of iron ore, will weaken. Economic growth in the world’s second-largest economy slowed again in the second quarter, according to official data released earlier this month.

As a result of these themes, spot iron-ore prices for a grade known as 62% fines delivered to China on the Steel Index have averaged around $136 a ton in the first six months of the year, compared with about $140.60 in the same period last year.

Worse still, recent research from analysts at Goldman Sachs and Macquarie Commodities Research suggests that iron-ore prices could fall as low as $80 to $88 a ton in the mid to long term amid the supply glut.

Concerns that lower iron-ore prices will suppress earnings has prompted shares in the world’s big miners to plunge.

Shares in Rio Tinto, which generates around 80% of its earnings from iron ore, have fallen 17% this year, BHP Billiton is down 12%, and Vale has slumped about 37%.

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