Mt Gibson Betters Forecasts But Price Still Key

This story features MOUNT GIBSON IRON LIMITED, and other companies. For more info SHARE ANALYSIS: MGX

-Cash balance building
-But will dividend increase?
-M&A risk
 

By Eva Brocklehurst

Mount Gibson Iron ((MGX)) skirted much of the bearish news surrounding the weak iron ore price after reporting increased shipments and sales in the June quarter, ahead of guidance.

The achieved price for standard fines was US$83/tonne and although down 13% on the prior quarter, this effectively implies a CFR price of US$100/t. Brokers concede this is a good result at a tough time, and reflects well on the quality of the product. The lower grade price was down 45% and this reflects the amount of discounting for low grade ore that iron ore miners are presently enduring.

The report highlights the advantages of higher grade material in a period of widening discounts and this gives comfort to CIMB, which expects the company will get a revenue head start in FY15. Mount Gibson signalled its average grade mined in FY15 will be greater than 61% iron, with Koolan Island at least 62% and Extension Hill around 60%. CIMB estimates that even at prices of US$80/t – a bear case scenario – Mount Gibson could continue to pay a 4c dividend for the next 10 years and still have a cash balance of $300m. The broker acknowledges that at US$80/t, the margins are very thin but, given the company is cash-backed to 48c per share it is not surprising it remains relatively less sensitive to moves in the iron ore price. On a risk-weighted basis CIMB prefers Mount Gibson to either Fortescue Metals ((FMG)) or Atlas Iron ((AGO)) at current prices.

The cash balance continues to build, with UBS noting it was $520m at the end of June. The company has stated previously its policy of maintaining a large balance for leverage in potential negotiations so the broker does not expect significant returns to shareholders in the near term. Moreover, UBS prefers BC Iron ((BCI)) as it has a lower headline price at which it breaks even, despite a similar cost structure. This is because Mount Gibson incurs additional freight charges of around US$10/t from shipping in Panamax vessels rather than Capesize vessels.

Sales were ahead of Macquarie's expectations with realised prices and cash flow in line. Aside from iron ore prices, the key catalyst in Macquarie's opinion, the consideration is how the company uses its cash, which currently accounts for two thirds of market capitalisation. Given the high level of net cash, Macquarie considers an increase in the dividend is a possibility at the full-year results in August.

JP Morgan observes ore grade and specifications should improve in FY15 with the cessation of Tallering Peak shipments. FY15 guidance has been deferred to the FY14 results report and the broker suspects the company will also announce the postponement of the Shine development, which is not included in estimates. The company has said development of the Shine deposit, acquired from Gindalbie Metals ((GBG)) for $15m, is being assessed in light of the current market conditions. Whilst the stock has a healthy cash level JP Morgan is still concerned about the limited mine life, the near-term stripping requirement at Koolan Island and the risk that the cash is deployed in merger and/or acquisitions.

Citi remains nervous about how the cash will be deployed and expects losses in FY15 because of lower prices, production and the Australian dollar's trajectory. This broker, too, does not include Shine in estimates, considering it uneconomic at current iron ore price forecasts. Credit Suisse notes the iron ore price will be the key catalyst going forward. Mount Gibson may be a high-cost producer relative to the major iron ore players but it has significant liquidity. Higher average FY15 grades should allow strong price realisation versus the index pricing.

Mount Gibson has three Buy and four Hold ratings on the FNArena database. Targets range from 70c to $1.10 and the consensus target is 84c, suggesting 22.6% upside to the last share price. There is a dividend yield of 5.0% and 5.8% on FY14 and FY15 consensus estimates, respectively.
 

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