Small Caps | Feb 15 2018
The hustler start Mount Gibson Iron earnings were ahead of expectations in the first half and the market is now focused on the redevelopment of Koolan Island.
-Achieves better pricing for its iron ore in the first half
-High quality of reserves at Koolan Island
-Market may not be prepared, as yet, to pay for Koolan Island
By Eva Brocklehurst
Brokers welcome Mount Gibson Iron's ((MGX)) first half results which signalled the company is doing well at controlling costs and achieving better pricing for its iron ore. FY18 group cost guidance is lowered to $45-50/WMT FOB.
Earnings of $80m included $64.3m in proceeds from the settlement of the Koolan Island interruption insurance.The company intends to grow its cash reserves and juggle the retention and utilisation of cash for value accretive investments.
Earnings were ahead of expectations, 24% above Macquarie's estimates, as the company obtained better pricing for its lump product.
While discounting for lower grade and higher impurity ore is a key feature of the iron ore market, the Western Australia producer managed to obtain average prices of US$60/DMT for its lump and US$29/DMT for its Iron Hill fines. Iron Hill produces a lump and fines product grading 61.5% and 59.5% iron respectively, with elevated levels of silica.
UBS notes perceptions are that greater discounts for lower and medium-grade iron ore are a permanent structural change to global pricing but considers that if this really is a structural change, then the index needs to be higher.
Mount Gibson discounts have been steady over time and there has been a slight reduction over the past few weeks, the broker observes, particularly a reduced silica penalty. Still, this could be the outcome of decreasing steel spreads and/or steel mills preferring cheaper ore and the broker considers it too early to call the trend. The situation is also clouded by the arrival of Chinese New Year.
Work on rebuilding the seawall at Koolan Island continues, and the company is on track for first ore sales in early 2019. The development has a reserve of 13mt at 66% iron with low levels of silica, alumina and phosphorus. Hence, the potential to yield a significant premium over benchmark iron ore prices.
Citi observes the company has around $477m in cash and this should stay above $400m, despite the capital expenditure required for restarting Koolan Island. Site work on the project started in June 2017 and it is around 33% finished.
UBS retains a Neutral rating, believing the market is not yet prepared to pay for the Koolan Island development. The broker acknowledges the high quality of the reserves – the highest in Australia – and the fact the project is tracking on time and budget. Moreover, there is potential upside to the resource of 7mt.
UBS values Koolan Island at around $0.10 per share. Risks include pit de-watering (to start in the June quarter), delays because of weather, and the actual start-up of operations.
FNArena's database shows two Hold ratings and one Buy (Macquarie). The consensus target is 50c, suggesting 15.5% upside to the last share price.
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