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Gauging the Upside Potential for Iron Ore Stocks

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Factors impacting analyst sentiment

A major factor impacting mining companies’ revenues and earnings is commodity price—especially for iron ore—and analysts’ ratings take cues from prices. Of course, there are company-specific factors also at play while analysts decide on upgrades and downgrades.

Iron ore prices have been on a real roller-coaster ride in 2017. After rising to a peak of ~$95 per ton in February 2017, they fell 40% to $57 per ton in June. The prices of steel-making ingredient started rebounding after hitting this low.

Depending on product mix, cash costs, freights, and indirect costs, the level of profitability of these mining companies can vary.

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BHP and Rio Tinto

Among iron ore miners (GNR), analysts have the most “buy” ratings for Rio Tinto (RIO) at 80%. Another 7% recommend a “sell” for the stock. One year earlier, 53% of these analysts were recommending a “buy” for the stock.

Rio’s recent efforts in debt reduction and capital returns have encouraged analysts to turn more bullish on the stock. Its target price has also seen an upward revision of 35%.

BHP Billiton (BHP) has 56% “buy” ratings from a total of 18 analysts covering the stock. Another 33% rate the stock as a “hold.” BHP has not seen much difference in terms of analysts ratings one year ago, when 47% of the analysts were rating it a “buy.” The revision to its target price in one year is 19%, which is also lower than that for Rio.

Rio’s target price implies an upward potential of 10.4%. BHP’s target price implies a 9.2% upside.

Vale SA and CLF

The majority of the analyst ratings for Vale SA (VALE) are leaning toward “hold,” with 55% of analysts making that recommendation. Another 36% rate the stock a “buy.” One year ago, only 15% of the analysts covering the stock had a “buy” recommendation on the stock.

Notably, 33% of the nine analysts covering Cliffs Natural Resources (CLF) have “buy” recommendations on the stock, while 44% of the analysts rate it as a “hold.” The number of “buy” ratings started steadily increasing last year, when CLF announced the renewal of its ten-year contract with its customer ArcelorMittal (MT).

The recent run-up of CLF stock has led its target price to imply a downside of 3.4% from its current price.

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