Australia | Apr 19 2012
– Grange delivers record quarterly shipments
– Southdown project remains a key catalyst
– Brokers continue to see value
By Chris Shaw
Grange Resources ((GRR)) delivered record shipments of 733,000 tonnes in the March quarter as the group ran down its pellet stockpile in the period and due to the timing of some sales from the final quarter of 2011.
Higher sales volumes offset lower realised prices, as Grange achieved a pellet price for the period of US$173 per tonne. This was short of the US$199 per tonne achieved in the previous quarter and UBS's forecast of US$180 per tonne.
While sales were higher, production in the quarter of 512,000 tonnes fell a little short of market estimates. As an example, Citi had forecast production for the quarter of 585,000 tonnes. UBS suggests the shortfall in production can be attributed largely to a maintenance shutdown during the period.
The quarterly report from Grange has been accompanied by the maintenance of full year production guidance, so it has been changes to commodity price forecasts by the likes of Citi and UBS that result in some adjustments to earnings estimates for the company.
Citi's earnings per share (EPS) estimates have been reduced by 23.9% in FY12 and by 15.3% in FY13 to 6.4c and 4.8c respectively, while UBS's numbers have been lowered by around 30% in both FY13 and FY14.
UBS is forecasting EPS for Grange of 11c this year and 10c in FY13, while consensus estimates according to the FNArena database stand at 9.6c and 8.7c respectively. Only UBS has adjusted its price target, to $0.85 from $0.82, on the back of the adjustments to its earnings estimates.
A key catalyst for Grange going forward is the Southdown project, where Grange has a 70% stake. A Definitive Feasibility Study (DFS) is largely complete and results should be announced later this month. Southdown is a $3 billion project and Grange hopes to fund its share with a 60:40 debt to equity ratio.
UBS notes the equity will be funded from current cash and the potential farm-down of stakes at Southdown or Savage River, or an increase in debt at the Savage River project. Grange's board is currently considering its options in terms of financing Southdown and Citi expects this process will be completed in the second half of this year.
On Citi's numbers Grange could dispose of a 20% stake in Southdown and so reduce its share of the equity required to between $550-$700 million, This could be met without and equity raising in the broker's view.
One potential negative is scope for delays at Southdown, JP Morgan pointing out tight credit markets have caused management to flag a delay in ramping up production. Despite this, JP Morgan retains an Overweight rating on Grange, the stock viewed as the preferred junior iron ore producer in Australia.
Others in the market are similarly positive as the FNArena database shows Grange is rated as Buy five times and Hold once among brokers in the database offering coverage. Valuation upside is the major supportive factor for the positive views on Grange, as the consensus price target for the stock according to the database is $0.84 against a share price of closer to $0.60.
In a slightly stronger market today shares in Grange are unchanged at $0.60 as at 10.20am. This compares to a range over the past year of $0.37 to $0.725. The current share price implies upside of around 40% relative to the consensus price target in the FNArena database.
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