Mount Gibson Iron Limited

Company Overview: 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 the company. MGX is known for producing and selling the highest grade direct-ship iron ore products in Australia.

MGX Details

Improving Top-Line: 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. MGX is mainly involved in the production and selling of the highest grade direct-ship iron ore products in Australia. As on 11 November 2020, the company’s market capitalisation stood at ~$818.28 million. The company’s overall objective is to maintain and grow its long-term profitability through the discovery, development, operation and acquisition of mineral resources. During 2016 to 2020, the company’s revenue grew at a CAGR of $16.5%.

Revenue Trend (Source: Company Reports)

Looking ahead, the company is focused on growing its profile as a successful and profitable supplier of raw materials and capitalising on its sound financial base to deliver attractive long-term returns for shareholders. At its Koolan Island operations, the company is focused on completing the elevated stripping phase of the life of mine plan to maximise sales and cashflow. Further, the company intends to capitalise on favourable iron ore market conditions by progressing its Shine Project to generate additional life and cashflows. With decent cash balance and zero debt on balance sheet, the company seems well placed to pursue internal and external growth opportunities.

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), comprising 2.6 Mwmt of Mid-West low grade material and 2.3 Mwmt of Koolan Island high-grade fines. For the full year, the company’s total revenue stood at $452.3 million, up by 56% on the pcp, mainly due to the increase in the total ore sales and average realized price. 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. Despite the significant impact 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 $121.1 million in FY20, up 72% on pcp. Further, the company reported net profit after tax of $84 million. During the year, the company’s cash and liquid investments increased by $38.7 million to $423.2 million, reflecting the operating site performances and decent iron ore prices.

FY20 Results (Source: Company Reports)

Key Metrics: For FY20, the company’s net margin stood at 18.7%, higher than the industry median of 7.2%. The company’s current ratio for FY20 stood at 6.0x, higher than the industry median of 1.64x, demonstrating that the company is well equipped to pay its short-term obligations. The company’s debt to equity multiple stood at 0.02x in FY20, lower than the industry median of 0.21x. 

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 74.5%. APAC Resources Ltd and True Plus Ltd. hold the maximum interest in the company at 36.41% and 13.82%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

September 2020 Quarter Results: For the quarter ending 30 September 2020, the company reported total iron ore sales of 1.4 million wet metric tonnes, comprising 0.7 Mwmt of Koolan Island high-grade fines and 0.7 Mwmt of low-grade material from the Mid-West operations. At Koolan Island, the company mined 5.2 Mwmt of ore and waste during the quarter, representing a 35% increase on the prior quarter. Further, the Ore sales from Koolan Island increased by 30% (QoQ) to 672,000 wmt in September quarter. From Mid-West Operations, the company’s total sales stood at 701,000 wmt, comprising 416,000 wmt of low-grade lump material and 285,000 wmt of low-grade fines.

Over the quarter, the company achieved several milestones including completion of the new Koolan Island airstrip, ongoing low-grade ore sales in the Mid-West and declaration of Ore Reserves for the initial stage of the Shine Project. As at 30 September 2020, the company had cash and liquid investments of $445 million and no borrowings.

Q1FY21 Performance Summary (Source: Company Reports)

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.

Change of Director’s Interest: Recently, one of the company’s Director, Lee Seng Hui, who holds indirect interest in the company, acquired 170,000 ordinary shares at $0.663954 per share. Lee Seng Hui now holds a total 431,819,861 ordinary shares in the company.

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.

What to Expect: Looking ahead, the company is focused on increased mining movements at Koolan Island to  complete the planned open pit waste stripping phase. Once the stripping phase is completed, the company expect significantly increased ore sales and cashflow at Koolan Island from early 2022 onwards. Further, the company is focused on completing low grade sales from Extension Hill. The company intends to drive sustainable cost improvements across all business units. MGX is on track to achieve its first ore sales from the Shine Project in mid-2021, subject to finalising the last commercial and permitting requirements. This will extend the company’s Mid-West business by at least two years and potentially longer if market conditions remain supportive.

In FY21, MGX expects its total Group sales to be between 2.8-3.3 Mwmt at a cash cost of $60-65/wmt FOB. During the year, Koolan Island is expected to contribute 1.8-2.1 Mwmt of high-grade iron ore fines sales. Further, the Mid-West operations are expected to contribute 1.0-1.2 Mwmt at an average cash cost of $40-45/wmt FOB, comprising the sale of remnant low-grade material from the Extension Hill site.

FY21 Guidance (Source: Company Reports)     

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Month

Stock Recommendation: The stock of MGX has provided a return of 13.82% in the past six months and is currently inclined towards its 52-weeks low price of $0.542, offering investors a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$0.594 and resistance of ~$0.934. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). Considering the company’s decent financial and operational performance in FY20, robust balance sheet, FY21 outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.700, up by 1.449% on 11 November 2020.

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

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