Mount Gibson Iron Limited

MGX Details

Q1FY22 Financial Highlights: Mount Gibson Iron Limited (ASX: MGX) is engaged in the mining and export of hematite iron ore. As a result of the deterioration of market conditions due to falling iron ore prices, a substantial increase in product discounts and penalties and more than double shipping freight charges, the September quarter proved very challenging for many iron ore producers.

• During the quarter, MGX posted revenue of $29 million FOB before adverse provisional pricing adjustments of $8 million.
• The company recorded ore sales of 0.4 million wet metric tonnes (Mwmt), which comprised 0.3 Mwmt from Koolan Island and 0.1 Mwmt from the Shine operation in the Mid-West.
• MGX recorded a cash outflow of $111 million, which indicates the net investment of $82 million at Koolan Island, Shine development, commissioning and initial operating costs of $17 million, interest and other income of $2 million, corporate and exploration costs of $4 million and realised hedging losses of $10 million.

FY21 Financial Summary:

• 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. The company posted sales revenue of $311.7 million against $415 million in FY20.
• Decline in Profit: The company recorded a gross profit of $121.2 million against $123.3 million in FY20. In addition, MGX witnessed a fall in profit after tax to $64.0 million as compared to $84.2 million in FY20.
• Rising Operational Cashflow: Cashflow from operation year increased to $165.2 million as compared to $160.1 million in the previous year.
• Shareholders Returns: The company closed FY21 with cash and investment reserves of $364.7 million, which included term deposits and liquid investments. The company declared a fully franked final dividend of 2.0 cents per share. Since late 2011, the company has distributed around $332 million in the form of a fully franked dividends.

Sales Revenue (Source: Analysis by Kalkine Group)

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.
• Commodity Price Risk: The company’s performance could be impacted by any adverse movement in iron ore prices.

Outlook:

• For FY22, MGX anticipates iron ore sales in the range of 3.0-3.2 Mwmt at site cash operating costs of $75-80/wmt FOB.
• The Koolan Island is likely to contribute iron ore sales of between 2.0-2.2 Mwmt for FY22.
  

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: MGX closed the quarter with cash and investments of $250 million as compared to $365 million as on 30 June 2021. This fall was mainly led by significant ongoing investment at Koolan Island, final development and commissioning at Shine and the rapid deterioration in market conditions. The stock of MGX is trading near to its 52-week low level of $0.390, offering a decent opportunity for accumulation. The stock of MGX has been corrected by ~11.11% and ~51.80% 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, risks associated with the fluctuations in iron ore price. For the purpose of valuation, peers such as Lynas Rare Earths Ltd (ASX: LYC), Mineral Resources Ltd (ASX: MIN), Champion Iron Ltd (ASX: CIA), and others have been considered. Considering the expected upside in valuation, increasing cash flow from operations, decent liquidity position, attractive returns to shareholders, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.395, down by ~1.251% as on 3 November 2021.

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.

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