FEX Valuation, page-431

The market moves quite quickly from industry to industry, regardless of the fundamentals. There is currently a lot of negative sentiment for iron ore, due to china clamping down on steel smelting (notwithstanding they openly stated they wanted to reduce the iron ore price) and the potential collapse of the Chinese property group, Evergrande. China is also entering their winter season, and the winter Olympics where they are known to try to reduce pollution during that period.

FEX as many iron plays, has risen and fallen by the iron price, regardless of the hedge that it has in place. Its still quite speculative as to what will happen and what will need to happen to push the sp higher. If we just isolate FEX's current situation, things that could lead to an increase in price, notwithstanding the macroeconomic environment and market sentiment:

• increase in iron ore price or even stabilisation of iron ore
• decrease in costs (AISC)
• increase in production (higher than guidance and/or expansion)
• increase in shipping frequency and/or quantity
• increase in iron ore grades (FEX already has good grades which helps)
• mine life expansion (currently ~7yrs)
• acquisitions (either in iron ore or other hot metals - FEX certainly has the cash to do it)
• takeover (less likely at this point unless above all lines up)

As pointed out, its actually 50,000t which ~equated to 45% of production.

Certainly that is one way to look at it, another way to look at is that it equates to a blended IO price of USD138/per tonne even if spot is USD92/per tonne, noting that FEX receives a USD16/per tonne premium.

At the moment FEX is oversold per TA and I've calculated EV to be NEGATIVE. FEX at 30 June had $69m cash, IO peaked in June/July, net profit could be around ~A$50m just for the Sep 21 qtr and then the HEDGE kicks in for 12 months. I've estimated the hedged portion to be worth about ~A$122m that's at roughly 92usd spot,

Lets say it hits 60usd spot, its still a blended price of USD130 for 12 months. Costs have been around $A80-90/per tonne. And even after paying out dividends at 50% NPAT, FEX could still have a closing cash balance after taxes of ~$76m on this model at the end of Sep 22. More than likely FEX will be looking is already looking to do something with that cash besides paying out more dividends.

In short, FEX has cash, grades, hedge, and time.