Company Overview: Mount Gibson Iron Limited (ASX: MGX) is a metal and mining company that produces and sells high-quality direct shipping grade iron ore products in Australia. MGX was incorporated in 1996 and was listed on the Australian Securities Exchange (ASX) in 2002. The company owns the Extension Hill/Iron Hill operations in the Mount Gibson Range south-east of Geraldton, and the high-grade Koolan Island mine off the Kimberley coast in the remote north-west of the State. The company has an experienced management team with a range of operating, commercial and corporate capabilities.

MGX Details

Driving Sustainable Cost Improvements: Mount Gibson Iron Limited (ASX: MGX) is an established Australian producer and exporter of high-quality direct shipping grade iron ore products. The company’s growth strategy is to expand its profile as a successful and profitable supplier of raw materials. Moreover, it intends to provide sustainable, long-term returns to its shareholders by optimising its existing operations and growing long-term profitability through the discovery, development and acquisition of mineral resources. The company’s corporate objective is to grow its cash reserves and to have an appropriate balance between the retention and utilisation of cash reserves for value-accretive investments. Over the last five years, the company has maintained its profitably and has witnessed significant improvement in its net profit before tax (NPBT). From 2016 to 2020, the company’s NPBT has increased at a CAGR of 8.99%.

5-Year Key Financials (Source: Company Reports)

Despite the adverse weather events in the Kimberley and the impact of travel and operating restrictions caused by the Coronavirus (COVID-19) pandemic, Mount Gibson Iron Limited was able to deliver solid financial performance in FY20. Going forward, the company will continue to drive for sustainable cost improvements across all business units and it will continue the search for acquisition opportunities in the resources sector. Heading into FY2021, the company intends to capitalise on favourable iron ore market conditions. With significant cash/investment backing and virtual debt-free position, the company seems well placed to pursue internal and external growth opportunities.

FY20 Results Highlights:  During the financial year 2020 or FY20, the company maintained its focus on the ramp-up of waste movement and ore production from Main Pit at Koolan Island and continuing the successful program to monetise stockpiles of remnant low-grade material from the Extension Hill and Iron Hill deposits in the Mid-West. FY20 was the first year of high-grade ore production and sales from the restarted Koolan Island operation. During the year, the company’s performance across its sites bolstered its cash and investment reserves.

Over the year, the company’s ore sales increased by 56% to 4.9 million wet metric tonnes and generated a sales revenue of $444 million. The profit before tax from continuing operations increased by 72% to $121.1 million in FY20. The average cost of sales increased to $60/wmt FOB compared with $50/wmt FOB in FY19, reflecting the first full year of production at Koolan and additional costs related to the disruption from unseasonal wet weather and COVID-19 restrictions. The company’s performance was assisted by continued strong iron ore prices and generally lower the Australian dollar over the year. The company’s net profit after tax stood at $84.2 million in FY20, compared to $133.4 million in FY19 which included the one-off recognition of deferred tax assets totalling $62.9 million. The company has declared a fully franked final dividend of 3 cents per share, payable on 24 September 2020. At the end of FY20, the company had a cash and investment reserves of $423.2 million, up 38.7% on the previous year.

FY20 Results Summary (Source: Company Reports)

Koolan Island Operations Update: During FY20, the Koolan Island operations generated EBIT of $102.4 million, reflecting the first full year of ore production and sales since restart as well as the continued strong pricing and demand for Koolan Island’s high-grade iron ore products. During H1FY20, the company implemented measured to improve groundwater management, mining conditions and productivity, resulting in improved Ore production and waste mining.

Production and Shipping statistics for Koolan Island Operations (Source: Company Reports)

Mid-West Operations Update: During FY20, the Mid-West Operations generated EBIT of $23.34 million. The continued customer demand resulted in total sales of 2.6 Mwmt comprising 1.4 Mwmt of lump material and 1.2 Mwmt of fines at an average site cash cost of $41/wmt FOB. The company expects the sales to continue towards the end of calendar year 2020 based on available low-grade stockpiles.

Production and Shipping Statistics for Extension Hill (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 77.65%. APAC Resources Ltd and True Plus Ltd. hold the maximum interest in the company at 35.15% and 14.12%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s EBITDA margin stood at 34.3%, up 6.9% on pcp. For the same time period, the company’s net margin stood at 17.4%, higher than the industry median of 16.1%. 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 1.83x, demonstrating that the company is well-equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Market Outlook: In FY20, the company’s financial performance was assisted by continued strong iron ore prices over the year. Due to the strong Chinese demand for steel, and ongoing mine supply disruption, the prices across all the company’s product types have remained elevated. Further, the premiums and discounts have narrowed as prices have risen above US$100/dmt CFR. Hence, the current market outlook seems positive for 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. It is worth noting that the company’s customers have all 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 on Koolan Island in the Kimberley region, and at Extension Hill and the Geraldton Port in the Mid-West region.

Key Risks: The travel and operating restrictions implemented in response to the Coronavirus (COVID-19) global pandemic from March 2020 onwards are creating challenging operating conditions for the company. Further, the company is exposed to the risk of adverse movement in the Australian dollar compared to the US dollar as its iron ore sales receipts are predominantly denominated in US dollar. The company’s operations are also exposed to commodity price risk as the company sells iron ore to its customers.

What to Expect: In FY21, the company intends to maintain an appropriate yield on the company’s cash and investment reserves while preserving capital for future deployment. The company will continue to drive for sustainable cost improvements across all business units and it will continue the search for acquisition opportunities in the resources sector.

At Koolan Island, the company will maintain its focus on increased mining movements to complete the planned open-pit waste stripping phase over the next 12-18 months. This is expected to increase ore shipment levels from the next financial year onwards. The company expects its total mining volumes to increase by 50% in FY21 as compared to FY20. Further, the company expects to reduce its unit mining and administration costs to around $9 per tonne of material (ore or waste) moved. In FY21, Koolan Island is expected to contribute 1.8-2.1 Mwmt of high-grade iron ore fines sales. Sales and cashflows from Koolan Island are expected to rise significantly in FY22 onwards.

The mid-operations are expected to contribute 1.0-1.2 Mwmt in FY20 at an average all-in cash cost of $40-45/wmt FOB. The company is expected to take a development decision for the Shine Iron Ore Project in the September 2020 quarter. It is worth noting that the development of the Shine Project represents an opportunity to use existing and efficient infrastructure to generate additional operating cashflows from the Mid-West business.

Overall, the company expects its total sales to be in the range of 2.8-3.3 Mwmt at a group cash cost of $60-65/wmt FOB before the waste stripping investment and improvement projects at Koolan Island.

FY21 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Company Reports)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (illustrative)

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of MGX has provided a return of 8.82% in the past three months and is trading lower than the average 52-week trading range. On the technical analysis front, the stock of the company has a support level of ~A$0.638 and a resistance level at ~A$1.026. With a robust balance sheet, the company seems well-placed to pursue internal and external growth opportunities. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). Considering the company’s decent FY20 performance, favorable market outlook, FY21 guidance and current trading levels, we give a “Buy” recommendation on MGX at the current market price of $0.745, up by 0.676% on 19 August 2020. 

MGX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer  

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.