Whenever the iron ore industry comes under discussion, investors normally only limit their discussion to the ‘Big Three,’ which are Vale SA (NYSE:VALE), BHP Billiton Limited (NYSE:BHP) and Rio Tinto plc (NYSE:RIO). Sometimes, Cliffs Natural Resources Inc (NYSE:CLF) (I will use CNR the rest of my article) is also added to the list. With the exception of CNR, hardly any other Canada-based iron ore company/trust is discussed in the market. The following briefly discusses the earnings preview of two Canada-based iron ore companies (including CLF) and one open-ended trust.
Cliffs Natural Resources
It is hardly a surprise that CNR’s stock price has not seen a rally as strong as its ‘Big Three’ peers. The following chart shows how these stocks have rallied after a surge in the spot iron ore prices since September last year:
The main reason for this has been that CNR is one of the highest cost operators among the major iron ore players. Therefore, the market has not bought this stock as they believe that the company is extremely vulnerable to a much-expected fall in iron ore prices (the rise is temporary given the recent stockpiling at Chinese steel mills). Nonetheless, the company seems to be an attractive short-term investment given that it is expected to report a strong 4Q on the back of strong iron ore prices in the last quarter (The company makes more than 80% of its revenues from its iron ore operations).
4Q Estimates: For CNR’s iron ore operations, a sale of 6.1mt from the US, 2.2mt from Eastern Canada and 2.5mt from Asia Pacific is expected. For US coal, the Street expects a sale of 1.6mt. In terms of revenue and EPS, the Street expects the company to make $1.54 billion and 59 cents, respectively.
Key themes for the quarter are likely to be:
1) Bloom Lake impairment (the sector seems to have established a pattern of combining this with a management change);
2) The street is likely to be disappointed with the US iron ore realized price guidance; and
3) Disappointing 4Q volumes - estimates imply misses relative to the full year guidance.
The company is expected to report on Feb 13.
Labrador Iron Ore Royalty Corporation
LIF is an interesting open-ended unincorporated trust. The trust gets 7% royalty on all sales of iron ore products by Iron Ore Company of Canada (IOC). This is the same company in which RIO has a 58.7% stake, followed by Mitsubishi (26.2%) and the trust itself (15.1%).