Iron ore rally sends mining stocks soaring

The four-month rally in iron ore stocks shows no sign of abating, with some miners hitting their highest share prices in more than a year this week.

The four-month rally in iron ore stocks shows no sign of abating, with some miners hitting their highest share prices in more than a year this week.

Shares in BHP Billiton and Rio Tinto were on Monday fetching their highest prices since February and March respectively, while Fortescue Metals Group has not been this valuable since May 2012.

The strong rally in the sector has come after a four-month period that was supposed to be its weakest of 2013, yet saw the benchmark iron ore price refuse to slip below $US130 per tonne.

A further rise in the benchmark price to $US135 per tonne over the past 48 hours fuelled further buying on Tuesday, and pushed Fortescue shares to $5.53 for the first time in 18 months.

Fortescue shares have rallied so strongly since they were below $3 in late June that Deutsche analyst Paul Young downgraded the stock to a sell last week on the basis that it had become over-valued, particularly when compared with BHP and Rio.

But the analysts at Macquarie, who are traditionally bullish about iron ore, wrote on Monday that Fortescue looks "considerably cheaper" than BHP based on a price-to-equity ratio.

"Despite the 80 per cent rally over the past four months, we continue to see value in FMG," they wrote.

Fortescue has a gross debt pile of $US12 billion, and the market has long debated whether the company will be able to service that debt over the next decade as iron ore prices gradually decline.

But Macquarie said Fortescue's recovery over recent months had been so strong that the debate was likely to shift to what the miner would do with its spare cash, rather than the debt challenge.

The bonanza is not confined to the Pilbara, with South Australian iron ore exporter Arrium Limited closing at $1.45 on Tuesday, after fetching less than 70¢ in June. The company formerly known as OneSteel hasn't tested these levels since the winter of 2011, when it was better known for its struggling steel assets than its growing iron ore business in South Australia.

Arrium's current rude health has vindicated chairman Peter Smedley's rejection of a takeover bid lodged by an Asian consortium just 13 months ago.

The 75¢ takeover offer was lodged when Arrium's shares were fetching less than 55¢, and Mr Smedley dismissed it as being "opportunistically timed" given a temporary slump in commodity prices.

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