Mount Gibson Iron Limited

Company Overview: Mount Gibson Iron Limited (ASX: MGX) is an established independent Australian iron ore producer with operations in the Mid-West and Kimberley regions of Western Australia. The company was incorporated in the year 1996 and was listed on the Australian Securities Exchange (ASX) in 2002. Headquartered in Perth, MGX owns the high-grade Koolan Island mine off the Kimberley coast in the remote north-west of the State, and the Extension Hill/Iron Hill operations in the Mount Gibson Range south-east of Geraldton. The company has an experienced management team with a range of operating, commercial and corporate capabilities.

MGX Details

Improvement in Bottom-line: Mount Gibson Iron Limited (ASX: MGX) is an independent Australian producer of high-quality direct shipping grade iron ore products, with assets in the Kimberley and Mid-West regions of Western Australia. The company is primarily involved in the processing of hematite iron ore at the Extension Hill mine site in the Mid-West region of Western Australia (WA), and mining and direct shipment of hematite iron ore at the Koolan Island mine site in the Kimberley region of WA. MGX is focused on providing sustainable, long-term returns to shareholders by optimising its existing operations and growing long-term profitability through the discovery, development, and acquisition of mineral resources. Over the last five years, the company has witnessed significant improvement in its top-line. From 2016 to 2020, the company’s revenue grew at a CAGR of 16.5%.

Revenue Trend (Source: Company Reports)

Despite the disruptions caused by the adverse weather events and travel and operating restrictions implemented in response COVID-19 pandemic, the company was able to deliver decent financial performance in FY20, demonstrating the strength and the resilience of its operations. Looking ahead, the company is focused on maintaining and growing its long-term profitability through the discovery, development, operation and acquisition of mineral resources. Further, MGX will continue to emphasise on sustainable cost improvements across all business units. Additionally, it will keep searching for acquisition opportunities in the resources sector. With sufficient funds and access to further equity and debt funding, MGX seems well-placed to maintain its existing operations and to advance its growth objectives.

FY20 Results Highlights: For the year ended 30 June 2020 or FY20, the company reported a total iron ore sales of 4.9 million wet metric tonnes (Mwmt), significantly higher when compared to ore sales of 3.2 Mwmt in FY19. The company’s total revenue in FY20 stood $452.3 million, up by 56% on the pcp, driven by the increase in the total ore sales and average realized price. For the full year, the company reported profit before tax from continuing operations of $121.1 million, up 72% on the previous year. Further, the company reported net profit after tax $84.2 million, lower if compared with a net profit after tax of $133.4 million in FY19 which included the one-off recognition of deferred tax assets totalling $62.9 million.

During FY20, the company was focused on ramp-up of waste movement and ore production from Main Pit at Koolan Island. Further, the company was also focused on monetizing stockpiles of remnant low-grade material from the Extension Hill and Iron Hill deposits in the Mid-West. Notably, FY20 was the first full year of production from the restarted Koolan Island. The company has declared a final dividend of 3.0 cents per share fully franked, payable either in cash or shares to eligible shareholders through the company’s Dividend Reinvestment Plan. As at 30 June 2020, the company had a robust balance sheet with cash and liquid investments of $423.2 million and no borrowings.

FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 77.67%. APAC Resources Ltd and True Plus Ltd. hold the maximum interest in the company at 35.14% and 14.12%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company’s net margin stood at 18.7%, higher than the industry median of 8.7%. For the same period, the company’s ROE stood at 13.2%, higher than the industry median of 8.1%. The company has a current ratio of 6.0x, higher than the industry median of 1.76x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Mineral Resources & Ore Reserves Update: In an update provided on 23 September 2020, the company informed that as at 30 June 2020, it had an estimated total Mineral Resources of ~69.4 million tonnes (Mt) of iron ore at an average grade of 61.7% Fe, compared to 74.2 Mt @ 61.8% Fe in FY19. Further, the estimated total Ore Reserves as at 30 June 2020 stood at 18.7Mt at 65.2% Fe compared to 20.3Mt at 65.5% Fe in FY19. The reduction in the Mineral Resources and Ore Reserves largely reflect mining depletion, net of Koolan Island Ore Reserve additions, and the removal of remnant resources at the now-rehabilitated Tallering Peak mine site.

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.

Iron Ore Pricing (Source: Company Reports)

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.

FY21 Outlook: Looking ahead, the company is focused on driving sustainable cost improvements across all business units. MGX intends to maintain an appropriate yield on its cash and investment reserves while preserving capital for future deployment. In FY21, 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 waste stripping investment at Koolan Island of approximately $100 million and other Koolan capital improvement projects of approximately $20 million. From Koolan Island, the company expects its sales to be between 1.8 – 2.1 Mwmt at A$60-65/wmt. The Mid-West operations are expected to contribute 1.0-1.2 Mwmt at an average all-in cash cost of $40-45/wmt FOB, comprising the sale of remnant low-grade material from the Extension Hill site.

At Koolan Island operation, the company is focused on completing the planned elevated waste mining phase over the next 12-18 months to deliver significantly increased production and cashflow from 2021/22 onwards. The company expects its total mining volumes to increase by 50% in FY21 as compared to FY20. The company intends to extend the current program of Extension Hill low-grade sales and transition the site to final closure. The Shine Iron Ore Project currently represents a potential near-term production opportunity with minimal start-up capital requirements.

The company expects its sales and cashflow to rise significantly from FY22 onwards. With significant cash/investment backing and no borrowings, the company seems well placed to pursue internal and external growth opportunities.

FY21 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/EBITDA 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 13.08% in the last three months and is trading lower than the average 52-weeks price level band, offering a decent opportunity for accumulation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of a lower double-digit upside (in % terms). Considering the company’s decent FY20 performance, positive market outlook, FY21 guidance and current trading levels, we give a “Buy” recommendation on MGX at the current market price of $0.750, up by 2.041% on 23 September 2020.

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

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