It's not surprising that investors are looking for exposure to iron ore right now. The price of iron ore has been highly volatile over the last few years, and as a result, many royalty companies had sky-high dividend yields.
Passive income investors scouring Canadian dividend stocks got caught up in buying these iron ore companies in 2020/2021 based on unsustainable dividend yields, and they're likely sitting on some hefty losses.
In markets like these some investors start digging through their screeners to identify the top Canadian value stocks to buy.
However, don't let volatile prices over the last few years deter you from investigating the top iron ore stocks in Canada. These companies still have outstanding business models and provide nice distribution payments for those comfortable with the overall volatility.
In this article, we'll look at two of the top iron ore stocks in Canada today.
What are the top iron ore stocks in Canada today?
Labrador Iron Ore (TSE:LIF)
Labrador Iron Ore Royalty Corporation, or LIORC as I'll refer to it, is a royalty company that derives all of its revenue from its investment in the Iron Ore Company of Canada.
IOC is a leading North American producer and exporter of iron ore pellets. The company's operations are all located in Canada, particularly Labrador City, Newfoundland, and it has a 24~ year expected mine life based on its current reserves.
Back to LIORC, it is structured in a way that its royalties are taken "off-the-top," which means the cash LIORC receives from IOC comes before expenses are deducted. A royalty compensation business model like this is similar to a company like the A&W Royalty Income Fund (AW.UN).
Also, much like a gold streamer like Franco Nevada (TSE:FNV), LIORC is not exposed to operating costs and thus is strictly dependent on the price of iron ore and total sales generated by IOC.
The company's distribution plan is to pay out a set amount and additional amounts depending on the iron ore price. This is why we saw its yield skyrocket to the 16% range during the pandemic and rising commodity prices.
As iron ore prices have settled, LIF's dividend will likely return to the high, single-digit price range again. However, this is still a strong company with a reliable history of paying out distributions.
It won't be a company that will provide you with a ton of capital appreciation, except in the case of another potential commodity boom. And even though this company has a royalty structure, Labrador Iron Ore Royalty's stock price will heavily depend on the overall price of iron ore. But with a high dividend yield, we really don't need it to.
Champion Iron (TSE:CIA)
Champion Iron is engaged in the exploration and development of iron ore properties in Quebec and Newfoundland, Canada. It trades under the ticker symbol CIA.
The company's projects include Fire Lake North, Powderhorn/Gullbridge, Moire, Quinto Claims, Harvey Tuttle, and O'keefe-Purdy. The company is the 2nd largest hub of high-grade exports globally.
The company has grown EBITDA from just over $250M in 2019 to over $926M in Fiscal 2022.
Its earnings have also grown more than 500% over that period as the company has fully taken advantage of the rising costs of iron ore.
In early 2022, the company started paying a $0.10 a share dividend, a bonus for those looking to capture passive income through a commodity investment. With a market cap of $2.7B at the time of writing, the company is larger than Labrador Iron Ore; however, the business models are much different.
As mentioned, Labrador is an off-the-top royalty company, while Champion Iron is a producer.
Analysts are bullish over the next few years, projecting earnings per share to top $0.78 in 2024. This would mark a 25% decrease from Fiscal 2021 levels, but it is crucial to remember that iron ore prices caused unsustainable short-term fluctuations in earnings.
If it does hit that earnings projection, it would achieve a healthy payout ratio of just over 50%.
Overall, these two iron ore options are great passive income options for Canadians who want exposure
The TSX is heavily exposed to materials industries. One of the most popular, of course, is iron ore. With the two options above, you can gain excellent exposure to the material and access some strong passive income streams. Over the past year, some Canadian stocks have struggled a bit due to falling commodity prices. But as they stabilize, cash flow should become more consistent along with stock prices.
Canadian mining companies are challenging to evaluate, so the simplistic nature of something like Labrador Iron Ores royalty structure is something investors may gravitate towards. However, if you want some exposure to a company with mining operations, Champion is also a solid option.