The rally in the BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price seems to be running out of puff, and it's probably no thanks to their rival.
The Fortescue Metals Group Limited (ASX: FMG) share price is powering ahead with a 3.4% surge to an 11-year high of $7.68 in the last hour of trade as BHP and Rio Tinto gave up morning gains to trade in the red.
Fortescue is already the best performing large cap miner in the March quarter with a gain of around 80% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 11%.
Building an iron bridge to higher quality ore
Investors have been flocking back into the miner as the Chinese discount for its lower quality ore narrowed but now Fortescue has given them a new reason to buy the stock.
The miner has said it will spend US$2.6 billion to build a new mine in Western Australia, which will substantially improve the quality of its ore.
The Iron Bridge project is forecast to produce 22 million tonnes of ore a year and the ore will contain 67% magnetite concentrate.
Most of the ore Fortescue is selling is rated at 58%. It blends higher quality ore from a smaller mine to lift the concentrate to 60% compared to the 62% purity rate by Rio Tinto and BHP.
Investors rotating into Fortescue?
It's perhaps no coincidence that Fortescue's share price is powering ahead at the expense of BHP's and Rio Tinto's share prices.
The impact of Cyclone Veronica on Rio Tinto's operations is probably not helping either with the miner declaring force majeure on contracts. This will see its total production for FY19 drop to the lower end of its guidance range of 338 million tonnes (mt) to 350mt.
Fortescue has done very well to turn sentiment but I think the easy gains for the stock are gone. Iron Bridge isn't expected to hit its straps until 2022 if development goes according to plan.
BHP and Rio Tinto are seen as the higher quality miners due to their assets, where they sit on the cost curve and their balance sheets. I don't think this will change and it's safer to invest in quality given that the operating environment looks this uncertain.
There's also room for earnings upgrade for BHP and particularly Rio Tinto if the iron ore price holds around current levels for 2019.
Having said that, I have taken some profit off the table recently given the strong advance by the sector but I remain overweight on mining stocks.
