Small Caps | Apr 18 2012
– BC Iron delivers solid quarterly performance
– High leverage to iron ore prices an attraction
– BC Iron rated as a Buy by all brokers offering coverage
By Chris Shaw
While the March quarter saw wet weather and cyclones impact on a number of resource projects in Australia, BC Iron ((BCI)) has managed to deliver a strong quarterly production report.
As BA Merrill Lynch notes, BC Iron remains on track to achieve its targets for FY12 of five million tonnes per annum of export production and to export 3.5 million tonnes of ore by the end of FY12. Stronger shipments were particularly evident during the quarter, Macquarie noting shipments for the period were 1.03 million tonnes, an increase of 51% relative to the December quarter last year.
Stronger shipments were matched by improved margins, Macquarie noting BC Iron's received price of US$124 per dry metric tonne was an increase of 7% over the December quarter. The margin outlook going forward appears attractive, as BA-ML expects costs should trend down from current levels of $58-$60 per tonne to a range of $40-$50 per tonne.
The increases in sales and production in the period has boosted BC Iron's cash position, which now stands at 52.5% against debt of $19.3 million.
The other highlight for the quarter in the view of BA-ML was that BC Iron has lifted reserves at the Bonnie East project to 7.7 million tonnes, which the broker sees as supportive for valuation. Total ore reserves for BC Iron now stand at 42.4 million tonnes, grading 57% Fe.
UBS remains conservative with respect to a ramp-up of production by BC Iron, while changes to the broker's iron ore and currency assumptions have impacted on earnings forecasts. In earnings per share terms UBS is forecasting outcomes of 40c this year and 78c in FY13, which compares to consensus EPS forecasts according to the FNArena database of 41.1c and 82.2c respectively.
Looking forward, UBS's Buy rating acknowledges the fact with much of BC Iron's capex already spent, the stock is highly leveraged to iron ore prices, operating expenditure and the Australian dollar. Given the stock is trading at a 23% discount to net present value but offers the potential for upgrades to production and earnings over the next 12 months, UBS sees value at current levels.
Macquarie agrees, suggesting investors in BC Iron are well placed to benefit from iron ore price upside, especially as the company has a simple operating model and low execution risk. BA-ML agrees, the broker's positive view supported by the potential to lift capacity beyond the current target of five million tonnes per annum.
The consensus price target for BC Iron according to the FNArena database is $3.60, which is up from $3.47 prior to the quarterly result. Targets range from BA-ML at $3.50 to UBS at $3.75. This is up from $3.35 prior to the quarterly update.
In a stronger overall market shares in BC Iron today are stronger and as at 1.30pm the stock was up 6c at $2.91. This compares to a range over the past year of $2.00 to $3.11 and implies upside of more than 22% relative to the consensus price target in the FNArena database.
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