Here’s why Atlas Iron Limited was up 40%

Here's why Atlas Iron Limited was up 40%

A quick rally in iron ore prices has catapulted junior miners up. Has iron ore finally hit bottom?

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published January 5, 2015 9:10 am AEDT

What: On the first day of trading in 2015, the iron ore miners have shot off, with Atlas Iron Limited (ASX: AGO) rocketing up over 40% in one day. Fellow mining juniors Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI) both jumped up around 17% in afternoon trading as well. They left 2014 with a whimper, but entered the new year with a roar.

What happened? Iron ore made a quick turn up at the end of December after hitting $66.84 on 23 December, a price not seen since June 2009. Recovering back up to around $71 at year end, the price jump may be because of the announcement the Chinese central bank is planning to make available around US$800 billion for lenders to support the slowing Chinese economy. This could stimulate steel production and the demand for iron ore.

The iron ore miners have had one beat down after another this year with each successive iron ore price drop- and still the worst may not be over yet. A Morgan Stanley analyst stated we may have seen the bottom now, but from my point of view that in no way means things will suddenly reverse course.

The iron ore majors in Australia- BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG)- all are still expanding production to maintain revenue and earnings levels as much as possible through high volumes. Already some iron ore from high-cost producers in and outside of China has left the market, but with demand in China flagging, there's not much to support a rising price.

Now what: That fantastic share price jumps we've seen today may be short-lived. Low volume trading days with many investors away from the market on holiday can have big price fluctuations. The gains could be given up quickly and we still can't say if the short iron ore price rally has much legs, either.

Stick to the fundamentals when looking at these iron ore stocks. If commodity prices continue heading south, these junior miners could still be in a jam. We'll only know the bottom after it's been hit and prices have climbed up appreciably. Sustained price recovery will only come from increasing demand and falling supply.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.