Mount Gibson In Best Shape Among Juniors, Relatively

This story features MOUNT GIBSON IRON LIMITED. For more info SHARE ANALYSIS: MGX

-Tallering Peak closes
-On track for guidance
-Sustainable dividend
 

By Eva Brocklehurst

Iron ore junior Mount Gibson Iron ((MGX)) stands out among its peers because of its cash holdings. This situation is expected to stand the stock in good stead while the iron ore price remains under pressure. Mount Gibson is highly correlated with the iron ore price and Credit Suisse observes it tends to outperform in a higher iron ore price environment and be somewhat resilient in a lower price environment, because of its comparatively high grade and quality product mix.

During the September quarter, Mount Gibson was attending to the closure of Tallering Peak, which contributed its final tonnage to the company's production profile. New mine equipment has now been delivered to Koolan Island and management expects continued productivity improvements there over FY15, with unit mining costs to be at the lower end of $7-9/t guidance. Credit Suisse observes the company is on track to reach 6.6-7.0m tonnes in iron ore sales for FY15. The September quarter reflected fair performances at Koolan Island and Extension Hill, in the broker's opinion.

While the cash burn continues with lower iron ore prices, mine pre-stripping and equipment replacements, this is expected to ease quickly beyond FY18. Near-term volatility may be pressuring margins but CIMB upgrades to Add from Hold on the basis of slightly improved forward earnings estimates, cash backing and recent share price weakness. The broker expects that as operations progress, the current cash holdings will enable the company to sustain a dividend of 4c per share, despite three years of higher strip mining at Koolan Island.

Mount Gibson reported a realised price for its fines of US$65/dmt FOB, down 22% quarter on quarter, with some impact from provisional pricing that reflected the continued decline in the iron ore price over the quarter. Cash was reduced by $55m, reflecting the decision to complete the cut back in the main pit over two years, which raises the strip ratio to 8-9:1 before it rapidly declines to less than 4:1 in FY18.

Going forward, UBS expects Mount Gibson to draw down cash reserves for the FY14 dividend payment but notes the potential for a near-term bounce in the iron ore price as Chinese steel mills re-stock ahead of the northern winter and the Australian wet season. This could produce a re-rating in the share price. The broker maintains a Neutral rating because of concerns over the medium to long-term iron ore price, although concedes the stock's cash backing makes it the most attractive of the junior iron ore players. The stock is also JP Morgan's preferred mid cap player as it is the best positioned amongst its peers to withstand a prolonged period of weak iron ore prices.

Acknowledging the cash backing, Morgan Stanley does not believe this is alone sufficient reason to hold the stock. Until capital expenditure at Koolan Island is completed the broker expects modest free cash flow and negative earnings. The required expenditure at Koolan Island could erode the cash base in the next two years, particularly if the iron ore price does not recover to the broker's base case scenario. This base case includes a US$89/t forecast for FY15 and US$86/t for FY16, on which Morgan Stanley projects Mount Gibson to be cash break-even. Larger, lower-cost iron ore exposures are the broker's preference and an Underweight rating is retained.

On the FNArena database there are two Buy and five Hold ratings. Consensus target is 69c, suggesting 34.5% upside to the last share price and the targets range from 65c to 80c. The dividend yield on both FY15 and FY16 forecasts is 7.2%.
 

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