Company Overview: Mount Gibson Iron Limited (ASX: MGX) is an independent Australian producer of high-quality direct shipping grade iron ore product. Headquartered in Perth, the company owns the high-grade Koolan Island mine off the Kimberley coast in the remote north-west of the State, and the Extension Hill/Iron Hill operations in the Mount Gibson Range south-east of Geraldton. The company’s relationship with its shareholders, suppliers, employees, contractors, traditional owner groups, regulators, landowners, local communities and interest groups ensures that it has the appropriate expertise, support, and permits to thrive in its areas of operation.
MGX Details
Well-Placed to Weather the Current Uncertainty: Mount Gibson Iron Limited (ASX: MGX) is an established Australian producer and iron ore exporter which seeks to provide sustainable, long-term returns to shareholders by optimising its existing operations and growing long-term profitability through the discovery, development, and acquisition of mineral resources. The company is primarily involved in the processing of hematite iron ore at the Extension Hill mine site in the Mid-West region of Western Australia, and haulage of the ore via road and rail for export from the Geraldton Port. As an established producer and exporter of hematite iron ore, MGX’s strategy is to expand its profile as a successful and profitable supplier of raw materials. From 2016 to 2019, the company’s total revenue and gross profit have grown at a CAGR of 5.74% and 48.8%, respectively.
Financial Performance (Source: Company Reports)
Despite the current COVID-19 situation, the company has continued its iron ore operations on Koolan Island in the Kimberley region, and at Extension Hill and the Geraldton Port in the Mid-West region. The company was able to finish the March quarter with solid cash and investment reserves. Moving forward, the company’s production and sales for the June quarter are expected to improve on the March quarter, subject to there being no further interruptions related to COVID-19 requirements or significant adverse weather events. With a decent balance sheet and high-quality Koolan Island iron ore product, the company seems to be well placed to weather the current uncertainty.
FY19 Results Highlights: During the financial year 2019, the company saw improvement in its profitability as its operational focus transitioned from the Extension Hill operation in the Mid-West to its high-grade Koolan Island operation in the Kimberley region. For FY19, the company reported a net profit before tax from continuing operations of $70.285 million and, following the recognition of deferred tax assets, a net profit after tax of $133.37 million. It is worth noting that the company’s performance was assisted by a substantial rise in iron ore prices over the year.
During the year, the company successfully restarted high-grade ore sales from Koolan Island, providing a strong foundation for generating cashflow for Mount Gibson into the next decade. The company’s total ore sales for the year stood at 3.2 million wet metric tonnes. Further, the company’s total sales revenue stood at $285.444 million.
FY19 Results Summary (Source: Company Reports)
H1FY20 Results Highlights: For the first half of FY20, the company reported revenue from ordinary activities of $258.1 million, up 41% on the previous corresponding period (pcp). Further, the company reported profit before tax from continuing operations of $64.2 million and net profit after tax of $44.6 million. During the period, the company’s cash and liquid investment reserves increased to $397.9 million at 31 December 2019 as compared with $384.5 million at 30 June 2019. The total iron ore sales for the half-year period stood at 2.8 million wet metric tonnes.
From Koolan Island Operation, the company reported half-year ore sales of 1.4 Mwmt, with December 2019 Quarter sales rising by 10% over the prior quarter. The site operating cashflow for the half-year period stood at $35 million.
H1FY20 Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 77.7%. APAC Resources Ltd and True Plus Ltd. hold the maximum interest in the company at 35.14% and 14.15%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For H1FY20, the company’s EBITDA margin stood at 34.3%, up from 33.9% in June’19 period. For the same time period, the company’s net margin stood at 17.4%, higher than the industry median of 14.3%. the company’s asset turnover ratios currently stand at 0.35x, higher than the industry median of 0.26x. The company has a current ratio of 6.10x, higher than the industry median of 1.81x, demonstrating that the company is well-equipped to pay its short-term obligations.
Key Metrics (Source: Refinitiv, Thomson Reuters)
March Quarter Update: During the March 2020 Quarter, the company reported Iron ore sales of 1.0 million wet metric tonnes, comprising 0.44 Mwmt of high-grade direct shipping ore (DSO) from Koolan Island and 0.59 Mwmt of low-grade material from Extension Hill in the Mid-West. For the quarter, the company reported sales revenue of $82 million Free on Board (FOB).
From Koolan Island, the company mined a total of 3.7 Mwmt of ore and waste. Koolan Island generated an operating cashflow of $15 million in the quarter before capitalised waste stripping investment of $16 million and initial construction costs on the new airstrip of $5 million.
From Extension Hill, the company’s sales in the March quarter were in-line with plan totalling approximately 587,000 wmt, comprising 233,000 wmt of low-grade lump material and 354,000 wmt of low-grade fines. Cashflow for the quarter totalled $5 million including $2 million from the ongoing rail credit refund. As at 31 March 2020, the company had cash and liquid investments of $402 million and no borrowings.
March Quarter Performance Summary (Source: Company Reports)
Change of Director’s Interest: Recently one of the company’s Directors, Lee Seng Hui, acquired 340,000 ordinary shares in the company. Lee Seng Hui now holds 406,860,492 ordinary shares in the company.
COVID-19 Update: In response to COVID-19, the company has implemented protocols to prevent the spread of the virus, consistent with prevailing advice from Western Australian (WA) and Federal health authorities. The travel restrictions and protocols are expected to cause some production disruptions and operating cost increases for Mount Gibson’s operations. It is worth noting that the company’s customers have continued to perform their obligations under its various offtake agreements, for both its Koolan Island and Mid-West operations. Despite the restrictions, the company was able to continue its iron ore operations at Koolan Island in the Kimberley region, and at Extension Hill and the Geraldton Port in the Mid-West region.
Key Risks: The company’s results are exposed to the interruptions related to COVID-19 requirements or any other significant adverse weather events. Further, the company’s operations are exposed to commodity price’s risk as it sells iron ore to its customers. The company is also exposed to the risk of adverse movement in the A$ compared to the US$ as its iron ore sales receipts are predominantly denominated in US$. It is also noteworthy that the company is expected to release its FY20 earning on 19 August 2020.
What to expect: Before COVID-19, the company was expecting its total iron ore sales for FY20 to be in between 4.8–5.3 Mwmt. Koolan Island sales were expected to be around 2.7–3.0 Mwmt of high-grade DSO and Mid-West is expected to contribute sales of 2.1-2.3 Mwmt of low-grade material at a cash cost of $40-45/wmt FOB. However, due to the uncertainty surrounding Covis-19 and related operating challenges, the company has withdrawn its sales and cost guidance for FY20.
The company currently expects improved ore production and sales from Koolan Island in the June 2020 quarter, subject to there being no further interruptions related to COVID-19 requirements or significant adverse weather events. Currently, Koolan Island sales are ramping up and the Mid-West’s low-grade sales are continuing, capitalising on iron ore market conditions. The company’s robust balance sheet along with significant cash/investment reserves and no borrowings provide MGX the operational flexibility and the ability to pursue internal and external growth opportunities.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (illustrative)
Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: Over the past six months, the stock of MGX has corrected by 34.76% and is inclined towards its 52-week low, offering a decent opportunity for accumulation. The company currently has a decent balance sheet with cash and liquid investments of $402 million as at 31 March 2020, and no borrowings. With a decent balance sheet and high-quality Koolan Island iron ore product, the company seems to be well-placed to deal with uncertainty caused by COVID-19. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). Considering the company’s expectation of improved ore production and sales performance from Koolan Island in June quarter, decent H1FY20 performance, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $0.640, up 4.918% on 1 July 2020.
MGX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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