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Why You Should Avoid These Mining Companies Today

By Matt Badiali, editor, Stansberry Research Resource Report
Wednesday, December 31, 2014

One of the world's most essential commodities is in a terrible bear market.
Iron ore, the building block for steel, has fallen 66% over the past four years... and 53% this year alone. Many iron ore miners are down double digits.
And that has many folks wondering if it's time to buy...
As regular Growth Stock Wire readers know, commodities like iron ore are tremendously cyclical. That means their prices go through big cycles of boom and bust.
Iron ore is in "bust" mode right now, thanks to a global oversupply and a slowdown in demand from places like China, which is a huge consumer of iron ore.
As you can see in the chart below, iron ore prices are now near their 2009 low.
But after the market leaves a natural resource for dead, things often get better. Production drops... demand picks up... prices eventually boom... and the share prices of miners soar.
And we're starting to see production of iron ore drop.
Iron miners in India, the world's third-largest exporter just three years ago, can no longer ship iron ore economically. According to R.K. Sharma, the secretary general of the Federation of Indian Mineral Industries – a mining lobby group – the miners didn't export "a single gram" in October and November. That's because it costs more to produce than they can get selling it.
Meanwhile, Australia's exports – which largely include iron ore – are at five-year lows. Low prices have caused around 140 million metric tons of planned new iron ore capacity to go offline.
But this decrease in future supply isn't enough to push prices up.
Roughly 80% of the world's iron ore production is still viable at the current price. So iron ore prices will likely stay low until more current and expected production goes offline... or until we see demand pick up.
That means giant iron ore miners like Vale, Rio Tinto, BHP Billiton, and Fortescue Metals Group will continue to feel the effects of low prices.
For starters, it's likely their earnings will take a hit in the fourth quarter of 2014... and that will continue to push share prices down.
Shares of Fortescue Metals, a large Australian producer, are already down more than half over the past year. Vale, Rio Tinto, and BHP Billiton are also down double digits.
Iron Ore as % of Sales
Iron Ore as % of Profits
12-Month Return*
Fortescue Metals (FMG.AX)
Vale (VALE)
Rio Tinto (RIO)
BHP Billiton (BHP)
Source: S&P Capital IQ
* Based on Monday's closing price

But there's likely more weakness ahead as iron ore prices look for a bottom and these companies' profit margins shrink.
The bear market in iron ore continues... So for now, stay away from mining companies that rely on iron ore for a large part of their revenue.
Good investing,
Matt Badiali

Further Reading:

"Mining can be a risky business," Matt writes. "Finding, building, and operating a mine is tough." But Matt says there's one type of "mining" stock up double-digits this year... and there's more upside ahead. Get all the details here.
Matt says there's another commodity that could soon soar... Learn why he says "2015 could be the year of the copper trade" right here.

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Market Notes
Transportation stocks finish the year strong... sector fund IYT rises 25%-plus in 2014.
WTI crude oil sinks to a five-year low.
Coffee prices drop double digits over the past month.
Retail industry is alive and well... sector fund XRT soars to an all-time high.
From The Crux
Market Watch
Symbol Price
S&P 500 2090.57 +0.1% +13.5%
Oil (USO) 20.30 -2.3% -43.4%
Gold (GLD) 113.67 -1.0% -3.0%
Silver (SLV) 15.11 -1.6% -21.6%
U.S. Dollar 90.20 +0.2% +12.3%
Euro 1.22 +0.2% -11.2%
Volatility (^VIX) 15.06 +3.9% +20.9%
Gold Stocks (^HUI) 158.34 -2.7% -20.1%
10-Year Yield 2.21 -1.8% -26.6%

World ETFs
Symbol Price
India (IFN) 25.89 +1.2% +39.8%
USA (SPY) 208.72 +0.1% +15.8%
China (FXI) 41.59 -0.2% +11.9%
Taiwan (EWT) 15.10 +0.5% +8.8%
S. Africa (EZA) 65.07 +0.6% +5.7%
Israel (ISL) 16.76 +0.1% +4.6%
Singapore (EWS) 13.08 +0.0% +3.7%
Canada (EWC) 28.86 -0.1% +2.2%
Japan (EWJ) 11.44 -1.0% -3.5%
S. Korea (EWY) 55.67 -0.4% -11.6%
Lat.America (ILF) 31.85 +0.4% -11.8%
Russia (TRF) 8.91 -3.3% -38.5%

Sector ETFs
Symbol Price
Semis (PSI) 25.73 -0.4% +40.2%
Biotech (PBE) 50.71 +0.2% +37.2%
Utilities (XLU) 49.11 +1.2% +34.5%
Real Estate (IYR) 78.12 +0.4% +28.5%
Health Care (IYH) 146.31 +0.3% +27.3%
Transportation (IYT) 165.42 +0.2% +27.2%
Big Tech (QQQ) 105.02 0.0% +21.8%
Financials (IYF) 91.38 +0.3% +16.0%
Consumer Svcs (IYC) 138.82 +0.6% +15.9%
Defense (PPA) 35.33 +0.1% +14.9%
Retail (PMR) 38.98 +0.5% +13.7%
Software (PSJ) 40.13 -0.6% +11.1%
Insurance (IAK) 50.59 +0.2% +9.0%
Industrials (IYJ) 108.32 +0.0% +9.0%
Basic Mat (IYM) 83.45 -0.1% +4.5%
Telecom (IYZ) 29.79 -0.1% +2.3%
Water (PHO) 26.17 +0.5% +0.7%
Media (PBS) 25.97 +0.3% -0.9%
Construction (PKB) 22.00 +1.2% -1.2%
Alt. Energy (PBW) 5.30 -0.6% -13.7%