There are some very juicy yields available right now in the mining sector, including double-digit ones. An example is iron ore producer Ferrexpo (LSE: FXPO). After the Ferrexpo share price slid 11% in a year, its current yield is a hefty 12.4%.
So, is this a high yielder I should add to my portfolio today – or a possible value trap?
Ferrexpo and business risk
Ferrexpo mines iron ore, which it sells in pellet form. Such pellets are in demand for industrial use worldwide. Indeed, Ferrexpo is the third-largest exporter of iron ore pellets on the planet.
Iron, like many metals with large-scale industrial applications, is a cyclical market. Right now, prices are high – which is good news for Ferrexpo’s revenues and profit margins. I also see reasons to be optimistic about pricing in the next few years. While economic contraction threatens demand in some markets, large users like China are expected to maintain a big appetite for iron ore pellets.
So far, so good. But I see a big risk with Ferrexpo’s business model. Not only it is it concentrated on iron alone, unlike more diversified mining groups such as Rio Tinto, it is also focussed on production from a single complex of mines. That concentration means that if something unexpected affects production in that area, it could hurt Ferrexpo’s revenues and profits badly.
On top of that, those mines are in Ukraine. So with political risks around Ukraine currently elevated, that could also be bad news for Ferrexpo. For example, foreign customers may seek to diversify their iron sources to limit their reliance on Ukrainian exports.
Double-digit yield
A high yield often signals elevated risk. So, although there are risks in owning Ferrexpo shares, I think to some extent those are already reflected in the company’s yield of over 12%.
I still would feel uncomfortable buying a company with such a high geographic concentration of production. The unusually high yield might make me think hard before deciding not to add Ferrexpo to my portfolio. However, I would still not buy the company. That is because I see another long-term risk that is not connected to its Ukrainian focus – iron ore pricing.
My next move on the Ferrexpo share price
While I think iron ore pricing could stay high for now, there is no guarantee it will. Sooner or later, if demand stays elevated, more production will probably come online and that could hurt pricing. That could be bad news for Ferrexpo’s profitability.
The company’s dividend has moved around with iron pricing. So, while it was 73c in 2020, the year before it was only 20c. That is a big movement, and a good reminder of what shifts in commodity prices can mean for the dividends of listed mining companies. When iron ore prices next fall, I expect the Ferrexpo dividend to follow. So I am looking beyond the immediate temptation of a current yield over 12% and will not be adding Ferrexpo to my portfolio.
5 Stocks For Trying To Build Wealth After 50
Markets around the world are reeling from the coronavirus pandemic…
And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.
But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.
Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…
You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.
That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.
Click here to claim your free copy of this special investing report now!
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
