Cashed Up BC Iron Delivers On Promise

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-Larger-than-expected final dividend
-Lots of cash so what are the options?
-Extend, explore and joint venture?
 

By Eva Brocklehurst

Mid-tier iron ore producer, BC Iron ((BCI)), wowed brokers with a large increase in the final dividend for FY13. Get it while you can, the brokers cry, in a cash-depleted mining world. Opportunities for spending the cash could present themselves to the company further afield.

The company has simply kept a promise to return cash, according to Macquarie. The final dividend of 30c was double the broker's forecasts. The year's total of 35c implies a 60% pay-out ratio. No wonder brokers are excited. Operating cash flow was 31% higher than Macquarie had forecast. The company has not altered guidance for a minimum 30% pay-out of earnings, but Macquarie has taken a punt and increased the pay-out assumption to 50%, to better reflect the near-term dividend potential of the stock. The broker's forecast is now for a 10% dividend yield over the next two years.

The dividend expectations may be heightened but assumptions regarding the earnings forecast are more modest. Macquarie incorporates a higher corporate overhead cost and slightly lower interest revenue and has reduced FY14 and FY15 expectations by 1-2%. BA-Merrill Lynch liked the results, which were right on expectations, while the 30c final was the notable surprise. The broker has also re-cast numbers to reflect higher depreciation and amortisation in the year ahead, as well as lower interest income and an increase in mine life. This all makes for a 10% reduction in profit forecasts for FY14 while the net present value is up 21%. 

BC Iron operates a sole asset, the Nullagine project, in a 75-25 joint venture with Fortescue Metals ((FMG)). If the company achieves its FY14 guidance of 5.8-6.2 million tonnes it would be vying for the number five position in the Australian iron ore production stakes, in Merrills' view. FY13's dividend of 35c represents a dividend yield of 8% on Wednesday's closing price of $4.29. Merrills notes mine life studies and extensions are being investigated at Nullagine and beneficiation of low-grade ore is continuing through the first half FY14. An extension to Nullagine is considered highly probable, with 2-4 years the likely outcome along with minimal capital expenditure.

The company may be swimming in cash, according to UBS, but needs a growth solution to continue to outperform its peers. UBS forecasts a 30c dividend for the first half of FY14 but this is highly dependent on the iron ore price, which the broker thinks will trend down to a long-term price of US$72/t CFR in 2017. The dividend may be elevated near term but the growth options should appear after 2020. UBS has also reconciled the FY14 outlook for higher charges and retains a cautious Neutral rating. UBS notes that BC Iron does not have a specific dividend policy but has indicated it would pay out around 30% of earnings, and would probably not go below this unless the market fundamentally changes. Dividends are based on the result each year, although the company has indicated it could become more formulaic. UBS thinks BC Iron will look to continue to pay out cash over and above three months of generated net cash flow.

BC Iron has indicated that one of the options to grow the business is to explore in Western Australia and Brazil. The company has entered into two memoranda of understanding in Brazil. The Brazil exploration budget for the next year is $1-1.5m, which UBS thinks is insignificant given the target is large. There could be upside if BC Iron does make a discovery in Brazil. The main priority locally is the extension of mine life at Nullargine. UBS thinks, with BC Iron long on cash and short on options, the opportunity comes in deals with companies that are the opposite – plenty of options but no money.

On the FNArena database, of the three brokers covering the stock there are two Buy ratings and one Hold. The $4.36 consensus target price shows 0.5% downside to the last share price and compares with $3.67 ahead of the result. The price targets range from $4.00 to $4.58. On consensus forecasts for FY14 the dividend yield is 9.7%. For FY15 it is 7.1%.
 

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