looking forward for 50% increase in sp, page-3

Credit Suisse

Rating (from Neutral) UNDERPERFORM* [V]
Price (23 Aug 13, A$) 0.70
Target price (A$) (from 0.65) 0.70¹
Market cap. (A$mn) 757.96
Yr avg. mthly trading (A$mn) 71
Last month's trading (A$mn) 65
Projected return:
Capital gain (%) 0.72
Dividend yield (net %) 2.9
Total return (%) 3.6
52-week price range 0.91 - 0.42

Mount Gibson Iron
(MGX.AX / MGX AU)
DOWNGRADE RATING
Biggest change is the share price
¦ FY13 reported earnings of $157mn included a tax credit that will act as an
MRRT shield. Excluding this accounting item, underlying earnings were
$93mn. Our forecasts moved only modestly following the FY13 results, so
we upgraded our target price to 70¢ps (from 65¢ps), in line with the
DCF. However, the share price has staged a 75% rally since late June
on the back of the iron ore price to reach 72¢ps, ahead of our target price.
We consider the price rally overdone and downgrade our rating to
UNDERPERFORM (from Neutral).
¦ Our estimates for MGX did not change greatly from the FY13 financial
results. Our most significant change was lowering Koolan Island material
movement costs in FY14. On the conference call, management noted these
costs hit the lower end of its targeted $8-$10 per tonne in July. We also
updated the iron ore price mark-to-market, and together these changes
increased FY14 earnings by 30%. Our FY15 and FY16 costs were already
appropriate and did not change, but earnings slid a few million on
adjustments to depreciation charges. MGX's cash generation is almost
unaltered and net cash is forecast to reach $670mn by FY16.
¦ Management presented its C1 cash costs from the financials as
$55/wmt in 2013, down from $95/t in 2012. Adding in royalties, shipping and
sustaining capital, we would estimate all in costs at about $80/t.
¦ Catalysts: The MGX share price appears to track the iron ore price, but with
much greater leverage. Iron ore price movements will likely control the share
price going forward.
¦ Our DCF valuation increased marginally to 70¢ps (65¢ps prev).