Small Caps | Oct 26 2012
– Grange endures a tough September quarter
– New mine plan should lower costs
– Southdown selldown a key catalyst
By Chris Shaw
The combination of a rock slide in July and rapid falls in iron ore prices meant the September quarter would be a challenging period for iron ore producer Grange Resources ((GRR)), especially in terms of operating costs and margins.
This is how things played out, as Macquarie notes Grange recorded a negative operating margin for the quarter as costs increased post the rock slide given the need to mine more overburden for less ore and the processing of lower grade materials.
Unit costs rose 37% in quarter-on-quarter terms to $130 per tonne, Macquarie noting this was a little above the realised price of US$128 per tonne, which fell by 14% in quarter-on-quarter terms. Given realised prices for Grange lag by about one quarter, further weakness in prices is expected in the three months to the end of December.
The ground failure in the September quarter has forced a new mine plan for Grange, one Macquarie expects will see 2013 output of 2.1 million tonnes in 2013 and 2.3 million tonnes in 2014. This compares to Grange's expectations of around 2.2 million tonnes next year and an average of 2.4 million tonnes per year over the life of the mine.
The new mine plan should generate lower costs, as BA Merrill Lynch notes cost guidance for the December quarter is US$105 per tonne. This should be enough in the broker's view to return Grange to a cash positive position.
Aside from production, UBS suggests a key catalyst for Grange in coming months will be the Southdown project sale process. At present the broker suggests the market is ascribing no value to Grange's 70% stake in the project, so crystallising value through any sale should have a positive impact on the share price.
BA-ML agrees, seeing any sale as reducing Grange's financial burden in terms of developing the project. At the same time BA-ML suggests the project is unlikely to go ahead shorter-term given existing capital and timing pressures evident across the market at present.
Changes to earnings forecasts for Grange have followed the quarterly report, with BA-ML cutting its earnings per share (EPS) estimates by more than 75% for this year and by more than 40% in 2013. Consensus EPS estimates for Grange according to the FNArena database now stand at 5.2c for 2012 and 3.0c for 2013, while Petra is forecasting EPS of 4.2 and 3.3c respectively. The consensus price target for Grange now stands at $0.44, down slightly from $0.45 before the production report.
What hasn't changed are broker ratings, as Grange continues to score one Buy, four Hold and one Sell recommendation. Petra is not in the database but also rates Grange as Hold, as despite value on offer at current levels the broker suggests the market wants more information with respect to the Southdown selldown before investors take a more positive view.
As well, JP Morgan suggests some caution is needed given the potential for further operational issues at Savage River. BA-ML is also conservative, taking the view uncertainty with respect to Southdown and on the back of a recent surprising change in management will be enough to limit share price performance.
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