Australia | Jun 19 2007
By Chris Shaw
The deals continue to flow for Australian iron ore hopefuls, with Murchison Metals (MMX) one of the latest beneficiaries thanks to a deal with the major Japanese trading company Mitsubishi.
That company has agreed to invest $3 billion for a 50% stake in Murchison’s iron ore prospects, the money seen by stockbroker Intersuisse as enough for Murchison to fund its share of the equity capital required to develop the Jack Hills iron ore mine and related port and rail infrastructure.
Currently Murchison plans to have Jack Hills producing as much as 25 million tonnes of high grade shipping hematite iron ore by 2011 and as part of the agreement Mitsubishi will pay about $150 million up front, Murchison receiving about $100m of that to retire debt and provide sufficient cash to fund its share of the next phase of expansion of the Jack Hills project.
In addition to Mitsubishi taking a 50% stake in the company’s iron ore assets the agreement calls for Murchison and Mitsubishi to form an infrastructure joint venture to develop additional rail and port facilities in mid-west Western Australia, a move the broker sees as being very significant longer-term given the WA government has only committed to one set of rail and port facilities for the region.
Now, with the two companies to consider additional developments, the broker sees scope for the region to deliver on what to date have been considered reasonably ambitious timeframes with respect to start-up times for new iron ore projects.
In the broker’s view the re-rating in the sector, which is based on expectations of Australia’s increasingly important position as a major supplier of iron ore to China in particular and Asia in general, is likely to continue for some time and Murchison should be held to take advantage of this expected re-rating.
There is some underlying support from earnings as on the broker’s numbers the company should post a profit in FY08 of around $19.5m, a solid improvement over the forecast loss for this year of $10.9m. On the broker’s numbers such an earnings outcome would put the stock on a P/E of about 80x for FY08, which reflects the share price having risen from a little over 50c this time last year to about $4.00 prior to news of the deal.
With the deal announced after the market closed yesterday shares in Murchison are much stronger today, as at 3.00pm the stock was trading up $1.01 or 25% at $5.04.