Investor Spotlight: Bucking the bears as iron ore mining surge

Mining stocks are flying once again off the back of hopes of a re-opening of China’s economy. In this week’s Investor Spotlight, we dig into the big three miners once again and look at whether now might be a good time to buy.

What’s happening with the iron ore price?

The iron ore price has bounced back, driven by the drip feeding of news regarding China’s relaxation of COVID-19 restrictions. The central government has approved measures to reduce lockdown times, narrow the scope of lockdowns during outbreaks, re-open schools, ease inter-province travel, and relax rules regarding PCR testing.

In addition to the prospect of greater movement activity, Chinese policymakers have also announced steps to support the country’s property sector and construction industries. A so-called “16-point plan” has been published, with measures including supporting lender liquidity, easing bank restrictions, and supporting development.

The iron ore price appears to be breaking out of a downward sloping wedge pattern now, as carves out a series of higher-lows and climbs above its 200-week moving average. The next key level to watch on the upside appears to be the 100-week moving average.

Iron ore weekly chart

The strength in iron ore has flowed through to the ASX 200’s material sector, which has underpinned the broader index’s strength lately. The sector’s technicals show that the price has approached a key level of resistance. If that holds, the charts show a possible emerging head and shoulders pattern.

Australia 200 Materials weekly chart

Three stocks to watch

• BHP (BHP)

Despite a volatile year, BHP is poised to deliver a tidy return for investors in 2022, with the stock up by more than 10 percent year to date. Add on dividends, which came in at a record in the 2021/22 financial year, and BHP proved a fruitful investment.

In the company’s most recent update, BHP management reaffirmed the guidance it provided with its half-year result. However, it did highlight the risks going forward from supply chain disruptions and higher costs.

The broker community generally remains bullish on BHP stock. Seven recommend a buy rating and 13 suggest a hold. The share price is currently trading at a premium to the consensus price target, which is $43.85.

BHP’s technicals suggest a bullish short-term trend. The stock is trading in the middle of its long-term range between roughly $35 and $55 per share. Momentum looks skewed to the upside, with the 100-week moving average a potential level of support.

BHP weekly chart

• Rio Tinto (RIO)

Although often dismissed as BHP’s uglier younger sibling, Rio Tinto has risen more than 16 percent this year, while also returning capital hand-over-fist to shareholders.

There is some reluctance from investors to invest in Rio over BHP, in part due to ESG concerns stemming from the Juukan Gorge fiasco. Nevertheless, analysts retain an overall buy rating on the stock, with eight recommending that action, and 10 suggesting a hold. Its price target is also at a smaller discount and at $111.35.

Rio’s recent production update met expectations, while also highlighting some of the growth headwinds emerging in Europe and the US, along with the “challenging” environment in China.

Momentum is to the upside for Rio shares, after it bounced off the 2022 lows around $87 per share. Previous resistance at $107 may act as future support.

Rio Tinto weekly chart

• Fortescue Metals Group (FMG)

As we discussed here last week, Fortescue Metals Group shares flew in November, as investors welcomed signs of a less-hawkish US Fed and the easing of Chinese COVID-19 restrictions.

Looking back through 2022 however, FMG has underperformed its Big Three counterparts, delivering a five percent return to its shareholders. It has also generously returned capital to investors.

Fortescue shares broke through the key levels identified in last week’s weeks during last week’s trade, with the next key level of resistance around $22 per share. Previous resistance at $20 may now be a level of support to watch.

Fortescue Metals Group weekly chart