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Cliffs Natural Resources Inc (CLF), BHP Billiton Limited (ADR) (BHP): Investing in Earth’s Most Abundant Element

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.

Cliffs Natural Resources Inc (NYSE:CLF)

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

Cliffs Natural Resources Inc (NYSE:CLF) produces both iron and coal. Although with over 80% of revenues coming from iron production, the overwhelming majority of its operations pertain to that industry.

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.

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