Something very big is happening in the mining world right now. And the shock has dragged on UK mining stocks, perhaps pushing some already cheap stocks into the bargain. The big news is that iron ore prices have fallen in recent months. In May, the price of the steel-making material reached a record 23 233 a tonne. On Monday, it dropped to 94 94 a tonne and is currently hovering around 10 107. In other words, prices have crashed more than half (-54.1%) in just four months. There are two cheap stocks here that I don’t have, but I will buy them today after their recent steep fall.
Cheap shares: 1. BHP Group
As a veteran value investor always looking for cheap stocks, I have BHP Group (LSE: BHP) firmly on my radar. At its current share price 1,883.8p, Anglo-Australian Mining Group valued at £ 98.7bn. This is what makes it one of them FTSE 100 The index is super-heavyweight. But these low-priced stocks are getting cheaper as the summer turns into autumn. Just six weeks ago, BHP shares hit a 55-week inter-day high of 2,505p on August 1. Today, the stock is cheaper than 620p, down nearly a quarter (-24.8%). However, a portion of this fall came after BHP paid a huge cash dividend to shareholders.
After this price crash, I see BHP’s cheap shares as a mandatory price for an income seeker like me. The stock now trades at an earnings rating of 11.3 times and yields an earnings gain of 8.8%. Dividend yields are 11.5% a year, more than three times Futsy’s forecast of 3.8% for 2021. However, like my stupid friend Roland Head, I don’t see this huge dividend as sustainable until 2022–24. Yet, for me, BHP offers cheap exposure to future economic recovery. Therefore, I will gladly buy and hold this stock today.
Dividend stock: 2. Rio Tinto
The second of my cheapest shares is another Anglo-Australian mega-minor: Rio Tinto (LSE: RIO) – ‘Red River’ in Spanish. Like big rival BHP, Rio saw its shares fall in early May. As I write, the Rio stock is around 4,919p, up from its 52-week high of 6,788p to about 1,870p. Thus, the stock has plunged more than a quarter (-27.5%) in 4.5 months. But again, like BHP, part of this fall could be attributed to the two huge dividends paid to shareholders on September 23rd.
After their recent sinking, I see the value of these cheap shares. The £ 81.7bn mining stock now yields a low-value-to-earnings ratio of 5.7 and earnings of 17.5%. The shares also yield a market-beating dividend of 10.2% per annum. Alas, I suspect that this bumper dividend, like BHP, cannot be permanent. In fact, it may well be cut unless the price of iron ore rises sharply from current levels.
Now for two news stories: One of the reasons for the fall in iron ore prices is China, the engine of global growth. Beijing has recently cut steel production to slow new construction projects. It is associated with the collapse near the giant Chinese property developer China Evergrand. If this company’s crisis infects China’s broader property market, it could be terrible news for mining stocks. Therefore, I hope that these two stocks will make an unstable and dangerous journey in 2021-22!
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Cliffordcy has no position in any of the shares mentioned. Motley Flower UK has no position on any of the shares mentioned. The opinions expressed in the companies mentioned in this article may differ from those of the author and therefore the official recommendations we make on our subscription services, such as Share Advisor, Hidden Winner and Pro. Here at The Motley Flower, we believe that considering a variety of insights makes us a better investor.