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3 Stocks to Buy Before Iron Ore Price Hike

Pressure on Chinese and Asian steelmakers to accept iron ore price hikes creates opportunity for mining stocks.



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Rio Tinto




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are asking Asian steelmakers to accept a 50% hike in contract iron ore prices, China Daily reported Thursday.

An executive at a large Chinese steel mill told the state media agency that

BHP Billiton

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; wants to sell its iron ore at spot market prices, which are currently much higher than the benchmark rates.

"If other Asian steel mills accept the new iron ore prices, then Chinese steel mills will have no other choice but to accept the same as stopping production is not in the best interests of the industry," the executive said. China's


said it would "wait and see how Japanese and South Korean steel firms react."

China's steel mills have been under pressure to accept a significant price hike on iron ore contracts after failing to reach an agreement with the mining giants during 2009 for the first time in decades.

According to China Daily, the country's crude steel output is expected to grow 8.6% to 621.5 million tons in 2010. Iron ore imports during January dipped to 46 million tons from around 60 million tons in December 2009. However, experts attribute this to maintenance works at Chinese Steel mills during this period and expect imports to pick up once again starting February.

Analysts have been predicting a much higher price hike in iron ore contracts. Both ANZ and Nomura Holdings estimate a 70% increase, while analysts at

Morgan Stanley

estimate a 60% hike in iron ore contract prices. As a result, mining stocks appear to be a good bet for investors, ahead of the contract announcements, which could provide a fillip to stock prices in the short term.

Vale is the most leveraged large cap miner to the iron ore story. Morgan Stanley raised its price target on Vale to $36 a share from the previous $34.5, following the news of iron ore price negotiations.

According to analysts polled by Bloomberg, the company is expected to post earnings of $2.03 a share during 2010, more than double that reported in 2009. Vale has 11 "buy", 7 "hold", and no "sell" ratings, according to TheStreet's Analyst ratings guide.

BHP Billiton, the world's largest mining company has performed better than peers during the recent past. The company may have received an average ore price of $64.8 a ton, excluding freight, in the December half, while Rio fetched $57.18, JBWere analyst Neil Goodwill wrote in a report earlier this week. The company had a net debt of $7.9 billion at the end of 2009 and a low net gearing of 15% compared to 29% for Rio Tinto. Further, analysts say that the company has enough cash flows from operations to cover debt investments of $12.8 billion in the year to June 2010 and $20.8 billion in the year to June 2011.

According to analysts polled by Bloomberg, BHP is set to report earnings of $22.56 per share for 2010, again more than double the $11.05 reported for 2009. The stock has seven "buy", three "hold", and no "sell" ratings, according to TheStreet's Analyst ratings guide.