As said in our blogpost on Northland Resources yesterday, iron ore prices have been sliding for almost 2 months now. 62%Fe is currently trading between $90 and $95 per tonne, which is a 3-year low.
We believe iron ore prices are relatively cheap now, and even though we don’t believe in the $180/tonne numbers from last year, we do believe in a sustainable benchmark price of $120-125/tonne for 62% ore.
The 35% drop in iron ore prices over the past two months has caused Vale’s (VALE) share price to fall approximately 20%. About 70% of Vale’s revenues are generated by iron ore sales, so Vale is a largecap company offering exposure to rising iron ore prices.
It could be an interesting strategy to write naked out of the money put options on Vale and thus place a bullish bet on iron ore prices. The September Put 15’s, the December Put 12’s and the March Put 10’s could be interesting for investors who believe in Vale. The worst thing that can happen is the assignment of common stock at respectively $15, $12 and $10 per share on those respective dates. Caveat; option trades are only for investors who understand the risks involved.
If you’re looking for junior companies with iron ore exposure, we like Northland Resources SA (NAU.TO), Black Iron Inc. (BKI.V), Alderon Iron Ore Corp. (ADV.TO, AMEX:AXX) and producers Cliffs Natural Resources Inc. (CLF), London Mining Plc (LOND.L) and African Minerals Ltd. (AMI.L).
Disclosure: The author has sold naked puts on Vale SA and Cliffs Natural Resources, holds a position in Northland Resources SA, London Mining Plc and Black Iron Inc., and has no position in Alderon Iron Ore Corp. and African Minerals Ltd. Please see our disclaimer for current positions.
