Is it time to get bullish on BHP, Rio Tinto and Fortescue?
Iron ore holds US$100 despite bearish forecasts. If prices persist, miners could deliver some solid dividends and FCF yields.
Source: iStock
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KEY POINTS
- If iron ore continues to sit around US$100 a tonne instead of falling to Morgan Stanley's US$94 forecast, Fortescue's free cash flow yield jumps from 5.0% to 8.6%, while BHP and Rio see smaller but meaningful gains.
- Iron ore has defined all bearish expectations, including further deflation in Chinese wholesale prices, plummeting property prices and lackluster steel production growth.
- December historically delivers 9.6% average gains for iron ore with prices rising 90% of the time since 2015 as Chinese mills stockpile ahead of New Year.
The only thing that's bullish about iron ore is that everyone is bearish.
When it comes to analyst commentary, modelling and forecasts, just about everyone expects iron ore to fall to US$90 a tonne or lower. Yet against all odds, iron ore has traded above US$100 for most of this year, creating a solid earnings backdrop for miners like BHP, Rio Tinto and Fortescue.
Iron ore price chart (Source: TradingView)
Valuations at spot prices
Given the bearish outlook, most analysts see modest upside in the iron ore majors. But there's a stark contrast if current spot prices hold. If iron ore remains around US$100, the outlook becomes far more attractive.
Ticker | Company | Rating | Target | Spot valuation |
|---|---|---|---|---|
BHP | BHP | Overweight | $46.50 | $50.00 |
RIO | Rio Tinto | Equal-weight | $121.00 | $134.50 |
FMG | Fortescue | Overweight | $19.90 | $20.95 |
Source: Morgan Stanley Research, October 2025
Iron ore spot is priced at US$101, while Morgan Stanley forecasts prices falling 7% in 2026 to US$94. This differential between spot and forecasts has material implications for key metrics like free cash flow and dividend yield.
Ticker | Company | FY26 FCF yield (base) | FY26 FCF yield (spot) |
|---|---|---|---|
BHP | BHP | 4.4% | 5.8% |
RIO | Rio Tinto | 3.2% | 4.6% |
FMG | Fortescue | 5.0% | 8.6% |
Source: Morgan Stanley Research, October 2025
Fortescue, with its pure-play exposure to iron ore, has the most upside. The FY26 free cash flow difference between base and spot price scenarios is 3.6 percentage points, while BHP and Rio Tinto both see 1.4 percentage points of upside.
This spot scenario translates to significantly higher dividend yields, with Fortescue's soaring 2.8 percentage points to 8.2%.
Ticker | Company | FY26 dividend yield (base) | FY26 dividend yield (spot) |
|---|---|---|---|
BHP | BHP | 3.9% | 4.6% |
RIO | Rio Tinto | 4.9% | 5.7% |
FMG | Fortescue | 5.4% | 8.2% |
Source: Morgan Stanley Research, October 2025
Wishful thinking?
Iron ore's tenacity has defied all odds. You rarely get a glimpse of optimistic economic data out of China, which consumes over two-thirds of the world's seaborne iron ore market. China's latest data points flag a rather grim outlook for the steelmaking ingredient:
The latest September inflation data had factory gate prices falling 2.3% year-on-year, marking a 36th straight month of declines
Q3 GDP decelerated to 4.8% year-on-year from Q2's 5.2%, though in-line with analyst expectations
A recent data dump flagged declining production across the board, with industrial production up 5.7% year-on-year in July (June: +6.8%), July PMI at 49.3 (June: 49.7) and July CPI of 0.0% year-on-year (June: 0.1%)
New property starts tumbled 15.2% year-on-year in July, decelerating from a 9.5% in the prior month
Crude steel output down 4.2% month-on-month and 4.0% year-on-year in July
Iron ore imports totaled 105Mt in July, up 2.0% year-on-year despite the slowdown of steel output, port inventories have been drawing modestly, according to Morgan Stanley
Though the data cuts both ways. If prices are still hovering around US$100 after all that, what would they look like under slightly better circumstances? Or perhaps the fundamentals are poor and as consensus suggests, prices will eventually drift lower.
Entering a bullish period
The four-month stretch between November and February is historically the most bullish time of year for iron ore. This momentum peaks in December, when prices have gained 9.6% on average (since 2015) and up 90% of the time.
Iron ore monthly price performance (Source: Author's own calculations)
This strength is likely driven by factors such as Chinese New Year, which takes place in late January and prompts steel mills and traders to stockpile iron ore ahead of the holiday. Other key economic meetings like the National People's Congress (typically mid-March) and Central Economic Work Conference (mid-December) also influence demand as they set economic policy priorities.
The bottom line
Iron ore is showing unusual resilience at a time when economic data suggests prices should be softening. This creates an interesting crossroad where iron ore majors are positioned to deliver some above-consensus free cash flows and market-leading dividends, should prices continue to hold. With iron ore now entering its historically strongest period of the year, the market may be underestimating the upside.
Still, the bear case remains valid, with muted demand and fresh supply from Rio's Simandou project and resilient production from the other majors (Vale, BHP and Fortescue). Time will tell whether prices hold or fundamentals finally prevail.
