Mount Gibson Iron Limited

MGX Details

Change in Substantial Holdings: Mount Gibson Iron Limited (ASX: MGX) is involved in the mining and export of hematite iron ore. On 14^th October 2021, FMR LLC and the entities have made a change to their holdings in the company to a voting power of 8.18% against the previous voting power of 7.15%.

FY21 Financial Summary:

• Completion of Mid-West Low-Grade Sales Program: During the year, the company successfully wrapped up the Mid-West low-grade sales program and resulted in cumulative cashflow of $30 million over the 19-month duration of the program.
• Iron Ore Sales: During FY21, the company reported total iron ore sales of 3.0 million wet metric tonnes (Mwmt), which comprised 1.8 Mwmt of Koolan Island fines and 1.2 Mwmt of Mid-West low-grade material.
• Decline in Profit: Gross profit for the year amounted to $121.2 million as compared to $123.3 million in FY20. In addition, MGX recorded a fall in profit after tax to $64.0 million against $84.2 million in FY20.
• Rising Operational Cashflow: Cashflow from operation during the year increased to $165.2 million against $160.1 million in FY20.

Gross Profit (Source: Analysis by Kalkine Group)

Elevated Iron Ore Prices to Support Future Growth:

• The company’s performance in FY21 was mainly backed by strong iron ore prices. The prices in all product types were growing, which was aided by strong Chinese demand for steel as well as the mine supply disruptions.
• The iron ore prices are likely to elevate and may support the company for future growth.

Key Risks:

• Climate Change Risk: MGX is exposed to a risk arising from the change in climate, which may lead its operation on a temporary suspension.
• Price Risk: The company’s performance could be impacted by any negative movement in iron ore prices.
• Regulatory Risk: MGX is exposed to a more complex regulatory environment; any failure may lead the business to fines, penalties, etc.

Outlook:

• The company is expecting iron ore sales in the ambit of 3.0-3.2 Mwmt at site cash operating costs of $75-80/wmt FOB for FY22.
• For FY22, the Koolan Island is expected to contribute iron ore sales of between 2.0-2.2 Mwmt.
• Looking forward, the company would continue to drive sustainable cost improvements throughout all business units.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: 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: As on 30^th June 2021, the cash and investment reserves stood at $364.7 million, which included term deposits and liquid investments. The company declared a fully franked final dividend of 2.0 cents per share. The stock of MGX is trading below its 52-week low-high average of $0.395-$1.010, respectively. The stock of MGX has been corrected by ~8.82% and ~49.99% in the past one and three months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering lower gross margin, low ROE, and fall in profits. For the purpose of valuation, peers such as Lynas Rare Earths Ltd (ASX: LYC), Mineral Resources Ltd (ASX: MIN), BCI Minerals Ltd (ASX: BCI), and others have been considered. Considering the expected upside in valuation, strong iron ore prices, rising demand for steel, increasing cash flow from operations, decent liquidity position, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.450, as on 20 October 2021, 10:50 AM (GMT+10), Sydney, Eastern Australia.

MGX Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.