Mount Gibson Iron Limited

MGX Details

2021 AGM Highlights: Mount Gibson Iron Limited (ASX: MGX) is an Australian based iron ore producer with operations in the Mid-West and Kimberley regions of Western Australia. On 10 November 2021, MGX held its 2021 Annual General Meeting (AGM), wherein the management highlighted that the company’s sales from Koolan Island operation are expected to increase significantly in the second half of FY22 as the advanced waste stripping program is substantially completed. Some of the key points highlighted at AGM are as follows:

• Iron Ore Sales Update: During FY21, the company reported total iron ore sales of 3.0 million wet metric tonnes (Mwmt), which resulted in sales revenue of $311.7 million, down from $415 million in FY20.
• Dividend Update: The company has paid 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.
• FY22 Focus: In FY22, the company is focused on progressing the Main Pit waste stripping and footwall support program at Koolan Island and completing the Shine operation’s transition at Mid-west operations.

September 2021 Quarter update: During Q1FY22, the company recorded ore sales of 0.44 million wet metric tonnes (Mwmt), which comprised 0.32 Mwmt from Koolan Island and 0.12 Mwmt from the Shine operation in the Mid-West. For the quarter, MGX posted revenue of $29 million FOB before adverse provisional pricing adjustments of $8 million. At the end of the quarter, the company had cash and investments of $250 million with no borrowings.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the risks related to the fluctuations in the prices of iron ore, as it could impact its financials. The company’s operational performance is also exposed to the risks related to consistency in government policy and the continued attainment of regulatory approvals.

Outlook: Looking ahead, the company is focused on implementing sustainable operating and cost improvements across the existing business. From Koolan Island, MGX expects its total sales in FY22 to be around 2.0 Mwmt.

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: Over the last three months, the stock has been corrected by ~9.41% and is trading lower than the average 52-week price level band of $0.35 - $1.01. The stock has been valued using the 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, considering risks associated with the fluctuations in iron ore price and uncertainties surrounding COVID-19 pandemic. For the purpose of valuation, peers such as Mineral Resources Ltd (ASX: MIN), Champion Iron Ltd (ASX: CIA), BHP Group Ltd (ASX: BHP), etc., have been considered. Considering the company’s robust balance sheet, expected increase in H2FY22 sales, decent outlook, current trading levels, indicative upside in valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.380, as on 17 December 2021.

MGX Daily Technical Chart, Data Source: REFINITIV 

Western Areas Limited

WSA Details

IGO Proposed Acquisition of WSA: Western Areas Limited (ASX: WSA) is a leading nickel producer in Australia that supplies high-grade nickel concentrates to the local and international smelter and refinery operators. On 16 December 2021, the company announced that it has entered into a Scheme Implementation Deed with IGO, under which IGO Nickel Holdings Pty Ltd (a wholly owned subsidiary of IGO) will acquire 100% share capital of WSA.

• As per the terms of the Scheme, WSA shareholders would be receiving A$3.36 per share in cash.
• The scheme is subject to various conditions, which include approval by Western Areas shareholders at a Scheme Meeting, which has been scheduled for April 2022.
• The Board of WSA has allowed IGO to undertake due diligence to support the submission of a binding change of control proposal.

Q1FY21 Operational Highlights: During the quarter ended 30 September 2021, the company mined total nickel of 3,741 tonnes as compared to 4,911 tonnes in June 2021 quarter. WSA sold 3,962 tonnes of nickel during the quarter and recorded operating cash flow of $31.1 million and closed the quarter with a cash balance of $147.7 million and no drawn debt.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Fluctuations in the Demand for Nickel: The company is exposed to the risks related to the fluctuations in demand for nickel, as it could impact the price of nickel in the market.
• Foreign Currency Risk: WSA is exposed to the risk related to the fluctuation in the exchange rates of foreign currencies.

Outlook: The Board of WSA has unanimously recommended its shareholders to vote in favour of the Scheme, in the absence of a superior proposal and subject to an independent expert concluding that the Scheme is in the best interests of Western Areas shareholders. It is expected that the transaction will be completed in April 2022.

Valuation Methodology: EV/Sales 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: The stock of WSA has provided returns of ~9.6% and ~14% in the past one and three months, respectively.  The stock is trading close to its 52-week high price of $3.51. The stock has a support level of $3.23 and resistance of $3.51. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a correction of low-single-digit (in % terms). The company can trade at a slight discount to its peers’ median EV/Sales multiple, considering the COVID-19 led uncertainties and volatility related to commodity prices, etc. For the purpose of valuation, peers such as IGO Ltd (ASX: IGO), Nickel Mines Ltd (ASX: NIC), Iluka Resources Ltd (ASX: ILU), and others have been considered. Considering the expected correction in the valuation, solid rally in the past few months, current trading level, and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $3.46 as on 17 December 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

WSA Daily Technical Chart, Data Source: REFINITIV 

Hawsons Iron Ltd

HIO Details

HIO to Increase its JV Interest in the Hawsons Iron Project: Hawsons Iron Ltd (ASX: HIO) is a mineral exploration company with a majority interest in the Hawsons Iron Project, in addition to other magnetite interests in the emerging Braemar Iron Province. On 13 December 2021, HIO announced that its joint venture partner, Starlight Investment Company Pty Ltd (Starlight), has not met its cash call under the Joint Venture Agreement. As a consequence of this, Starlight’s 6.037% interest in the joint venture will be partially diluted and HIO’s 93.963% interest in the joint venture will be increased.

2021 AGM Highlights:

• Resource Upgrade: On 16 November 2021, HIO held its 2021 AGM, wherein the company highlighted that it has recently announced the Mineral Resource Upgrade for the Hawsons Iron Project, which included a 9% increase in the indicated resources and an 18% increase in the inferred resources.
• Raised Capital: The company has raised ~$35.6 million (before costs) through a fully underwritten private placement and an entitlements issue to shareholders to fund the completion of Bankable Feasibility Study.

Improving Cash Balance: Due to the share purchase plan announced in October 2020, successful private placement to sophisticated and professional investors, which was completed in April 2021, the company’s cash position increased from year end 30 June 2020 by ~$1.63 million to ~$2.35 million as at 30 June 2021. The cash position further improved in the September quarter to $33.95 million, due to the raising of ~$35.59 million (before costs) through a fully underwritten private placement and an entitlements issue to shareholders.

Cash and Cash Equivalent Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Fluctuations In Iron Ore Prices: Since the company is involved in the exploration of iron ore, it exposes it to the risks related to the fluctuations in the iron ore prices.
• COVID-19 Uncertainties: The company is exposed to the risks related to the uncertainties surrounding the COVID-19 pandemic as it could impact the company’s exploration programs.

Outlook: Looking ahead, the company expects the life of mine tonnages to increase further at the Hawsons Iron Ore Project with the planned resource extension drilling being initiated in October 2021. The company is targeting to start-up the production of 10 million tonnes per annum in 2024.

Stock Recommendation: Over the last three months, the stock has provided a return of ~66.66%. The stock is currently trading higher than the average 52-week price level band of $0.03 -$0.221. The stock has a support level of 0.101 and resistance of $0.17. On a TTM basis, the stock is trading at a price to book multiple of 5.7x, higher than the industry (basic materials) median of 2.4x, thus seems overvalued. Considering the stocks’ decent return in the last three months, current trading level, risks associated with volatility in iron ore prices, valuation on TTM basis, and uncertainty surrounding the COVID-19 pandemic, we suggest investors to book profit and give a “Sell” rating on the stock at the closing price of $0.145, up by ~11.538%, as on 17 December 2021.

HIO 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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