The Running of the Pilbara (Iron Ore) Bulls

Kingsley Jones

Jevons Global

Three months ago, we discussed the price correction then underway in iron ore prices and recommended standing back from all stocks, except BHP Group.

In this research note, we review our estimates of the average cost of entry for investors in shares of the major listed iron ore producers. This is our method to gauge investor sentiment and to determine when bear market conditions have abated.

The stocks surveyed are:

  • BHP Group BHP.AX
  • Fortescue Metals Group FMG.AX
  • Rio Tinto Ltd RIO.AX
  • Mineral Resources MIN.AX
  • Champion Iron CIA.AX
  • Grange Resources GRR.AX
  • Mount Gibson Iron MGX.AX

The list comprises all ASX-listed iron ore producers capped over $500M AUD. To simplify the equation BHP is 70% of the combined market cap, followed by RIO at 14% and FMG at 11% and MIN at 3%. Pick a major for the core and a minor for the satellite

For the companion report see:

  Is iron ore done and dusted?

For discussion of the cost-basis method to measure market sentiment see:

The role of sentiment in iron-ore stocks

These two reports set the scene for what follows. In a nutshell, we measure investor sentiment in iron ore stocks by estimating the average price investors paid for their shares.

If the current price is above cost basis the share is in a bull market.


If the current price is below cost basis the share is in a bear market.

Three months ago, only Mineral Resources and BHP Group were in a bull market, with the latter hovering close to tumbling into a bear market.

The situation is more positive now, with all the majors trading in bull territory.

Hence, we are calling The Running of the Pilbara Bulls - a new bull market.

Since this is iron ore, we will need to keep an eye on where the bulls run to.

If they run back off a cliff, we shall update these indicator sets.

PERFORMANCE since Last Report

Our previous report, titled “Is Iron Ore Done and Dusted”, was published on 2-Sep-2022. Then we identified that the iron ore sector, apart from BHP Group and Mineral Resources had entered a bear market, as measured by our cost basis indicator.

The purpose of this technical indicator is to alert us to when investors are likely holding positions that are underwater on their purchase price. This affects sentiment negatively and can prolong periods when stocks simply trade sideways to down. Those names with positive sentiment, which we identify with the average investor positions being in profit, tend to do better under such conditions of uncertainty.

The total return since is shown in Exhibit 1. The two stocks highlighted in orange, in panel (a), were the only two that were trading in a positive sentiment condition in our previous report.

Exhibit 1: (a) performance since 2-Sep-2022 and b) correlation between cost basis signal and performance

Of course, no purely formulaic approach to selecting stocks can be perfect, any more than the traditional methods of fundamental analysis. Champion Iron Ore had negative sentiment in our last note but has come in at number two over this period. Indeed, the fundamentals swayed in this case, as the firm posted a reasonable earnings report and record production.

The correlation between our unrealised profit and loss signal three months prior, and the toral return over the period since, is shown at panel (b). There is a near 78% correlation between the two, which is encouraging, but should not be over-interpreted. These tools can be helpful for risk management, but the fundamentals driving changes to the operating conditions of the sector are of key importance.

Favoured Names

The bear market sentiment that made us so cautious in our last note has now largely abated. Five of the seven focus list names are showing positive investor profit and loss, Exhibit 2. 

Exhibit 2: Iron ore producers of capitalisation > $500M ranked by investor unrealized profit and loss

The weakest remain the two smaller iron ore plays, Grange Resources and Mount Gibson Iron. These are clearly still in bear market conditions, as shown at Exhibit 3, and at Exhibit 4.

Exhibit 3: Grange Resources is still in bear market territory when judged by the average cost-basis signal
Exhibit 4: Mount Gibson Iron is also in bear market territory when judged by the average cost-basis signal

Fortescue Metals Group has recovered into positive territory, Exhibit 5, as has Rio Tinto, Exhibit 6, but the valuation discount to BHP Group, as shown at Exhibit 2, is not great enough for us to change our view on BHP as the preferred major.

Exhibit 5: Fortescue Metals Group was trading in bear territory but has since recovered

Exhibit 6: Rio Tinto was also in bear territory but is now trading back above average cost basis.

On valuation grounds, both Mineral Resources and Champion Iron Ore are offering some discount to BHP Group and improving fundamentals with iron back above $100 USD/tonne. Each of these stocks is trading back above cost basis, with Mineral Resources the strongest.

Exhibit 7: Mineral Resources never entered a bear market during the last iron ore sell-off.
Exhibit 8: Champion Iron did trade into a bear market but has since recovered strongly
Exhibit 9: BHP Group did flirt with a bear market but was strongest among the majors.

The investment case for Mineral Resources now rests on the recovery in the iron business profitability providing cash flow to help grow their very attractive lithium business. Our previous concern was that the firm might be under pressure to restructure. In the case of Champion Iron Ore, CIA, higher grade iron ore is key to lower carbon emissions from steelmaking. The premium for such products should help support the business. In our view, CIA warrants a small position as a satellite to our core portfolio holdings in BHP, and the diversified growth options presented by MIN.

Please see the attached PDF file for the full report and further profit and loss charts.

Image credit: Photo by San Fermin Pamplona - Navarra on Unsplash

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Jevons Global Pty Ltd is a Corporate Authorised Representative (AR 1250727) of BR Securities Australia Pty Ltd (ABN 92 168 734 530) which holds an Australian Financial Services License (AFSL 456663). GENERAL ADVICE WARNING Please note that any advice given by Jevons Global Pty Ltd (Authorised Representative #1250727) is GENERAL advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs. You should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Jevons Global is authorised to provide financial services to WHOLESALE clients only. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Prospectus, Product Disclosure Statement or like instrument. Jevons Global may receive fees from issuers, the subject of the research notes we distribute. In addition, Directors, Authorised Representatives, employees and contractors may own shares or options in the securities mentioned in such notes.

Kingsley Jones
Chief Investment Officer
Jevons Global

Dr Kingsley Jones is Founding Partner/CIO for Jevons Global. He has been Portfolio Manager for the Macquarie Global Thematic Fund and Global Head of Quantitative Trading Research at AllianceBernstein, and holds a PhD in Theoretical Physics....

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