Covid-19 continues to disrupt many industries, especially mining. Now, mining stocks aren’t exactly the most glamourous businesses out there, but they do provide an essential service. And there’s one UK share that has exploded during this pandemic, with its share price increasing by over 200% since March 2020, even though it remain cheap.
What is causing this enormous growth? And should I add the stock to my Stocks and Shares ISA? Let’s take a look.
An explosive UK share
Ferrexpo (LSE:FXPO) is a supplier of high-quality iron ore pellets for the global steel industry. The UK share is currently the third-largest supplier of blast furnace pellets worldwide. But what makes it so unique compared to other iron mining stocks?
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There are two aspects of the business that make it stand out to me. Firstly it operates nine mines along a single ore body. This is quite significant as it practically eliminates most of the site discovery expenses mining companies typically have to deal with.
Secondly, the extracted metal is magnetite ore rather than the more common hematite ore. Without going too deep into the realm of chemistry, turning magnetite into iron pellets is an exothermic reaction. Meaning the process releases heat. Therefore, the energy requirement of this reaction is lowered, ultimately reducing the production cost.
Combined, this grants Ferrexpo significant cost-saving advantages over its competitors that lead to higher margins.
The price of iron ore is surging
China recently began issuing a stimulus package to reboot its economy. And since the steel industry is a large driving force of that economy, the demand for iron pellets has skyrocketed. Yet the supply continues to be restricted. And when demand outweighs supply, prices begin to rise.
The price of iron ore is now at the highest point in almost a decade. Needless to say, this is fantastic for Ferrexpo which, despite disruptions from Covid-19, appears to be at full operating capacity. In fact, total pellet production for this UK share actually increased by 7% in 2020. That’s quite impressive, in my opinion, but there are always risks to consider.
Nothing lasts forever
Just as quickly as iron ore prices go up, they can come back down. As the world begins to return to normality, the supply restrictions on iron and other metals will start to ease. If demand starts to fall, the prices of iron ore will fall in a similar fashion.
After all, the market determines metal prices, not the company. Having virtually no pricing power is a weakness all mining stocks share. And it can have a profound impact on the business. Just take a look at what happened between 2011 and 2016. Iron ore prices plummeted from $188/tonne to $41/tonne, and the Ferrexpo share price dropped by nearly 95% alongside it.
A UK share to buy today?
Iron ore prices will undoubtedly stop climbing eventually. However, the world appears to be in the middle of a technological shift. Self-driving cars, electric batteries, renewable energy all of these technologies require a lot of precious metals — including iron – to manufacture.
So, while supply may increase, I believe demand will remain high for many years to come. And with a P/E ratio of 7, Ferrexpo is one cheap UK share I’d consider adding to my portfolio.
