Here’s what a spike in iron ore prices means for BHP Group Ltd (ASX:BHP), Fortescue Metals Group Limited (ASX:FMG), and Rio Tinto Limited (ASX:RIO)…
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According to CommSec, the spot iron ore price jumped a massive 7.8% higher to US$176.90 a tonne. This means the steel making ingredient is trading at a nine-year high.
Why did the iron ore price jump higher?
The iron ore price jumped higher yesterday amid concerns over a supply outage at one of Vale’s mines in Brazil.
According to Reuters, a landslide at the mine near the site of the 2019 Brumadinho dam disaster tragically buried and killed a worker on Friday.
The worker, who was employed by a Vale contractor, was in a bulldozer when the side of a pit collapsed at the Corrego do Feijao mine.
While the extent to which Vale’s production will be affected following the accident remains unclear, traders appear to believe the suspension of activities will have a big impact on Vale’s iron ore production in the near term. This has driven the spot price to levels not seen since 2011.
What does this mean for the iron ore miners?
With the iron ore price fetching US$176.90 a tonne, BHP, Fortescue, and Rio Tinto are generating significant free cash flow from their iron ore operations.
For example, BHP’s cost guidance for iron ore in FY 2021 is US$13 a tonne to US$14 a tonne. Whereas Fortescue is currently pulling iron ore out of the ground with a C1 cost of just US$12.74 per wet metric tonne. Finally, Rio Tinto is targeting Pilbara iron ore unit costs of US$14 to US$15 per tonne.
With prices as high as they are and these miners boasting such low costs, it will come as no surprise to learn that they are being tipped as generous dividend payers in 2021.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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