Iron is Today’s Most Profitable Metal

This according to a study released last week by industry analysts Wood Mackenzie.

The report estimated average 2014 industry margins for the iron ore sector at $49 per tonne. Equating to a 52% margin at average forecast prices.

The analysts noted this stands in stark contrast to many other mined products. Where prices today stand perilously close to the industry-average cost of production.

Bauxite mining, for example, was estimated at less than 25% margin for 2014.

The story in thermal coal is even more bleak. Wood Mackenzie sees average margins for the industry at just 19% during the coming year.

There’s a couple of ways to look at this news: what it means for miners right now, and what it means for these businesses in the future.

For the time being, things are going to be tough for groups like coal producers. Margins are tight, and cash flow is going to be constricted.

But there’s an important implication for the future here. With prices hovering near the industry’s cost of production, thermal coal shouldn’t drop much more. Any moves lower would cause losses of production enough to materially impact supply.

That means a lot less price risk.

Recognizing this, investing in coal producers or coal assets may be a good strategy right now. It simply requires finding mines or miners at the lower end of the cost curve. The ones who will be able to survive–and even prosper–during the current downtime for the industry.

Price fluctuations are usually one of the biggest potential pitfalls in making mining investments. Although it may be hard to imagine right now, investors should actually take comfort in having that risk significantly reduced by today’s depressed coal market.

Here’s to low prices curing low prices,

Dave Forest

dforest@piercepoints.com / @piercepoints / Facebook

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