Company Overview: Mount Gibson Iron Limited (ASX: MGX) is an independent Australian producer of high-quality direct shipping grade iron ore products. The company’s flagship operation, Koolan Island is located in the Buccaneer Archipelago 140km north of Derby. In the mid-west region, MGX operates the Extension Hill mine site and retains the closed Tallering Peak mine. At the Geraldton Port in Western Australia, MGX has two storage facilities with a combined ore storage capacity of 360,000 tonnes. The company was listed on the Australian Stock Exchange (ASX) in 2002.

MGX Details

Top-line Growth Supported by Improved Iron Ore Prices: Mount Gibson Iron Limited (ASX: MGX) is an Australian based iron ore producer and exporter that owns the Extension Hill operation in the Mount Gibson Range, and the Koolan Island mine off the Kimberley coast in the remote north-west of the State. The company’s Shine Iron Ore Project, located in the Mid-West region of Western Australia, represents a near-term, low capital production opportunity for MGX. The company’s strategy is focused on maintaining and growing its long-term profitability through the discovery, development, operation, and acquisition of mineral resources. From 2016 to 2020, the company’s revenue grew at a CAGR of 16.6%.

Top-line Trend (Source: Refinitiv, Thomson Reuters)

Looking ahead, the company is focused on capitalising on the favourable iron ore market conditions to generate additional life and cashflows from its Mid-West business. At Koolan Island, MGX is planning to start life extension drilling in the 2021 dry season, targeting extensions to known satellite deposits on the Island. Moreover, the new Shine Iron Ore Project is on track to commence sales in the September 2021 quarter. With its healthy balance sheet comprising cash, term deposits and liquid investments of $435.7 million as at 31 December 2020, MGX seems well placed to pursue internal and external growth opportunities.

Decent Growth in H1FY21 Net Profit: During the first half of FY21, the company’s results were benefited from the decent rise in iron ore prices and steady ore sales from the high-grade Koolan Island mine in the Kimberley region. Total iron ore sales for H1FY21 stood at 2.3 million wet metric tonnes (Mwmt), generating iron ore sales revenue of $240.7 million Free on Board (FOB). Cashflow from operations stood at $113.8 million in H1FY21, up from $66.4 million in the previous corresponding period (pcp). Over the half-year period, the company completed mid-West low-grade sales program at Extension Hill, which generated over $30 million in cashflow since mid-2019 on sales of 4.1 Mwmt. Net profit after tax for H1FY21 stood at $74.5 million, up by 67% on pcp. As at 31 December 2020, the company had cash, term deposits and liquid investments of $435.7 million.

H1FY21 Result Summary (Source: Company Reports)

FY20 Results Highlights: For the year ended 30 June 2020, the company reported total iron ore sales of 4.9 million wet metric tonnes (Mwmt), up 56% increase on the prior year. Total revenue for FY20 stood at $452.29 million, up from $289.47 million in FY19. Despite the significant impacts of extreme Kimberley wet season weather and the operating challenges caused by the COVID-19 pandemic, the company’s profit before tax from continuing operations stood at $125.03 million. During the year, the company completed the first full year of production at the restarted Koolan Island operation and also extended the life of the Mid-West operations through the sale of remnant stockpiled low-grade material into a robust iron ore market. As at 30 June 2020, the company had an estimated total Mineral Resources of ~69.4 million tonnes (Mt) of iron ore at an average grade of 61.7% Fe. Further, the estimated total ore reserves as at 30 June 2020 stood at 18.7Mt at 65.2% Fe.

FY20 Results (Source: Company Reports)

Key Metrics: Over the past five-years, the company’s profitably margins have improved, supported by decent iron ore sales and improved prices. EBITDA margin for FY20 stood at 37.9%, up from 29.2% in FY19. Net margin for FY20 stood at 18.7%, higher than the industry median of 7.2%. Current ratio for FY20 stood at 6.00x.

Past 5-years Financial Performance for Year Ending 30 June, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 77.68% of the total shareholding, while the top four constitutes the maximum holding. APAC Resources Ltd and True Plus Ltd. are holding a maximum stake in the company at 36.41% and 13.82%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Risks: The company’s operational performance is exposed to the risks related to consistency in government policy, the continued attainment of regulatory approvals, the ability to delineate new mineral resources and ore reserves, and the continued control of operating and capital costs. Further, the company is also exposed to the risk related to the changes in the iron ore prices and foreign exchange rates.

Outlook: The prices of all iron ore products continue to remain elevated, underpinned by strong Chinese demand for steel and ongoing mine supply disruptions. MGX’s Koolan Island operations provide it the ability to capture premium (+65% Fe) prices at all price levels. The demand for lower and medium grade products is also strong, supporting the outlook for Shine Project. The company is progressing the construction of New Shine Iron Ore Project and is on track to commence sales in the September 2021 quarter. At Koolan Island, the company expects the sales in the March and June 2021 quarters to remain similar to the December 2020 quarter before rising from the September 2021 quarter onwards. The company expects the elevated waste stripping to complete in September 2021 quarter, enabling materially increased ore sales and cashflow thereafter. For FY21, the company expects its ore sales to be in the range of 2.8-3.3 Mwmt, including circa 1.8 Mwmt from Koolan Island. The company’s cash cost guidance for FY21 is set at $65-70/wmt FOB.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock has corrected by 15.32% in the last three months and is trading lower than the average 52-weeks price band of $0.570 and $1.01, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$0.654 and a resistance of ~$0.903. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average, considering the favourable iron ore market conditions, elevated iron product prices, and modest outlook. We have taken peers like Champion Iron Ltd (ASX: CIA), Fortescue Metals Group Ltd (ASX: FMG), and Mineral Resources Limited (ASX: MIN). Considering the company’s decent performance in H1FY21, favourable iron ore market conditions, healthy balance sheet, modest outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.755, down by 3.206% as on 24 March 2021.

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

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