1 Iron Ore Stock To Buy To Play A Rebound, 1 To Avoid

The iron ore market is showing signs of improvements, as prices increased to a three-month high and Brazil reported the third highest shipments ever in a month. However, as we will discuss later, the market still remains balanced and investors are looking at what actions the new leadership will take in China to boost steel demand.

We have a bullish stance on Vale S.A. (VALE). We think that this low cost producer with its long life reserves and strong balance sheet is well positioned to benefit from a rebound in iron ore prices. Vale is also offering a dividend yield of 3.4 per cent. However, the CLF Natural Resources (CLF) has operational concerns and it might cut dividend if prices do not rebound. Other than a dividend cut, raising capital and selling core assets are the other two options for CLF. We would advise investors to avoid this iron ore stock for the time being.

Vale is trading at a cheaper forward P/E ratio of 7.4x against its peer CLF which is trading at 9.4x. Vale has a dividend yield of 3.4 per cent and CLF's dividend yield of 6.9 per cent is almost double that of Vale's; however, we believe Vale's dividend yield is sustainable. Both stocks have lost value YTD. Vale is down 22 per cent whereas CLF is down 46 per cent.

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