A mining company with an 11% dividend yield and a ROE of 25% and little debt?

This company is a mining giant that is trading at a good price due to a particular market situation.

There is a high correlation between BHP and the iron ore price

BHP is a huge Australian company with a market cap of USD131 billion, sales of USD61 billion and a profit in the last 12 months of USD11 billion. Around half of the sales and 80% of the EBITDA come from the sale of iron ore (very similar case to Cap), so the correlation between the physical sales and the sale price of this mineral and the company´s cash flows are evident, which is clear in the chart above.

As I mentioned in today's Fepic article, the iron ore price has fallen by 60% since July (in 4 months), due to the restrictions on the purchase of coal that China imposed on Australia 1 year ago. This situation (which affected the supply of iron ore in China), together with the high global demand caused by fiscal and monetary stimulus measures to counteract the effects of Covid 19, have caused a coal shortage in China which caused that this mineral to rise more than 300% in 11 months (to October of this year). This shortage of coal implied an energy crisis in China (not only of rising prices but also of electricity rationing), which motivated the Chinese Government to take measures so that the available coal was used in the production of electricity at the expense of other industries. As steel production uses coal and iron ore, since there was not enough iron ore, the production of steel fell and that caused the demand for iron ore to fall too, which caused the precipitous fall of this mineral.

Maybe the price of iron ore continues to fall. However, there are signs of hope that could change the direction of the commodity. Today, the Prime Minister of Australia in an interview with Bloomberg, said that the talks with China have been in good mood in the last 24 hours, and there are also several reports in the press that several ships with coal of Australian origin that were waiting to be unloaded at ports in China, have started to be unloaded in recent days. Something similar can be read about iron ore. When reviewing the freight rates of the "dry bulk" segment (which uses iron ore and which has also fallen almost 60% in 40 days for the same reason stated in this article), it seems they could be finding a short-term floor.

As I pointed out in the article about Cap on September 24th in www.fepic.cl , Invercap - which is the parent company of Cap (a stock that, although smaller in size, is a competitor of BHP in the iron ore segment), is buying Cap shares since several weeks ago (in a public offer). It is reasonable to think that the owners of this player have more (and better) information than us.

Note: This is not an investment recommendation nor investment advice, and we only share our ideas of instruments that we find interesting to look at. You should consult with your Investment Advisor before making any decision to buy or sell any instrument mentioned in this article. The profit or loss of the purchase of any of the instruments mentioned in these notes is 100% your responsibility.