The reflation trade has been one of the big stories of the past year, with energy stocks, materials stocks, and names in the metals and mining sector coming back with a vengeance after they fell during COVID lockdowns. The resurgence of both mining and energy has been slowed since then, many stocks being far below 52-week highs.

This is because inflation fears have cooled somewhat, and China’s Evergrande woes have dampened expectations for growth in China, the world’s largest consumer of raw materials. Evergrande may lead to slowdowns in Chinese construction and real property, which could adversely affect steel and iron producers. 

As such, the world’s three big iron ore producers, Rio Tinto (NYSE:), Vale (VALE), and BHP Group (NYSE:) have all declined significantly in recent weeks, and now all yield over 10% in their dividend payouts.

Jefferies (NYSE:) analyst Chris LaFemina recently put out a note, explaining that “if the reality in China is a soft landing in which the government manages the Evergrande collapse without causing contagion, these shares are undervalued and would likely outperform… This is our cautiously optimistic base case, and we reiterate Buys on Rio, BHP, and Vale.”

While caution is indeed prudent, these depressed levels and large payouts mean risk-tolerant investors can be paid generously to be patient while waiting for sentiment to improve.

Rio Tinto Plc (RIO)

The U.K.-based Rio Tinto is now down about 30% from its 52-week high set in May. RIO Tinto trades at only 6 times earnings. This makes it look cheap in comparison to the wider market. Shares now yield just above 10% with a $6.85 dividend. (See Rio Tinto stock charts on TipRanks)

The most diversified of the three companies in this article, in addition to iron ore, RIO also offers , aluminum, precious metals, and even diamonds and uranium. 

The consensus rating for Rio Tinto is Hold. Two analysts give it a Buy rating while one gives it a Hold. One analyst has a Sell rating. Rio Tinto’s average price target of $88.36 indicates a 34.2% upside over the current price. 

BHP Group Plc (BHP)

Australia’s BHP Group is down 34% from its 52-week high, which was also set in May. BHP shares trade now at a multiple 12 price-to-earnings ratio, which is high compared with Rio Tinto but low compared to other markets. BHP yields 11.1% with an average payout of $6.02 per share. BHP’s operations include iron ore mining, copper and coal. It also has oil and natural gas and other energy-related activities. (See BHP group stock charts on TipRanks)

BHP is seen as a Moderate Buy by analysts, with the four analysts covering the stock evenly split between Buy and Hold. BHP Group’s average price target is $37.61, which represents a 28.4% decline from the current level.  

Vale S.A. (VALE)

Brazilian giant Vale surged to a 52-week high of $23.18 in July, before a steep decline over the last two months has seen it decline 37% to $13.80. Vale trades at just a 5.5% price-to-earnings multiple. Although shares are yielding an eye-popping 18.8% with a $2.74 payout, it is important to remember that as with other Brazilian stocks, the ultimate amount of this payout can vary depending on the company’s full-year fiscal results. Vale’s income comes mainly from iron ore but it also gets revenue from copper, nickel and precious metals.  (See Vale stock charts on TipRanks)

The analyst community rates Vale as a Moderate Buy, with 5 of the 8 analysts covering the stock rating it a Buy, two calling it a Hold and one analyst giving it a Sell rating. Vale has a $21.31 average target price for the stock, which represents 54.4% of its upside from its current level.  

Takeaway

While this has been a difficult time for iron ore companies and stocks related to raw materials in general, patient investors who buy these stocks now are getting them at a steep discount to where they were just a few weeks ago. They are also being compensated generously for holding on to their stocks, the 10%+ payments offering both a reward and a backup for valuation.

In the case of more volatility, the large capital status of these stocks will also be better than those of junior miners. Lastly, as we saw earlier this year, if China’s growth concerns are sorted out or if inflation buzz heats up again, these stocks can all move to the upside quickly.

Disclosure: Michael Byrne had no position at the time this article was published.

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