macquarie on the quarterly

Stock: GRR AU
Name: Grange Resources
Price: A$0.55
Market Cap (m): A$629
Current valuation (DCF): A$1.08
12mth price target: A$1.00
Recommendation: Outperform
Volatility index: Very High


Event
• GRR reported December quarter production results


Impact
• Savage River production target achieved. Concentrate production increased 10% qoq to 612kt (pcp: 556kt). Pellet output increased by 25% to 632kt (Sep q: 506kt), 2.5mtpa annualised. GRR achieved 1.98mt pellet production for CY11, in line with guidance of 2mt. GRR sold 475kt pellets in the quarter (Sep q: 494kt) – a further 235kt were sold post quarter end. We had modelled CY11 production/sales of ~1.9mt.
• Unit costs improve. Now that mining of the main ore zone has been re-established, corresponding ore grade improvements have contributed to lower unit costs of A$90/t pellet, down 30% from A$128/t reported in the Sep q. Total CY11 cash costs were A$221m; we had modelled A$230m.
• Pellet price declines, margins remain solid. GRR reported December quarter prices of US$199/t FOB, a 9% qoq decline (vs US$218/t for Sep q). We anticipate weaker pellet prices in the March quarter, as GRR's contract price is lagged by a quarter; indeed GRR indicated that post quarter, pellet prices fell to US$176/t. At current operating costs of A$90/t, FOB margin (pre royalties) remains above A$80/t (Dec q: ~A$107/t).
• Higher production to be maintained in FY12. GRR has provided guidance of 2.3-2.4mt pellets for 2012, a 15-20% increase on FY11.


Action and recommendation
• Outperform. We believe GRR remains well placed to capitalise on any tightness in the iron ore market given its installed pellet production capacity. The dividend introduced recently provides shareholders with direct exposure to Savage River cash flows. We flag near-term iron ore price risk.

December 2010A 2011E 2012E 2013E
Sales revenue m 311.3 419.4 483.0 527.8
EBITDA m 100.8 221.8 272.4 302.0
EBIT m 63.4 180.4 229.5 253.2
EBIT growth % 206.5 184.3 27.2 10.3
Recurring profit m 71.6 179.6 210.4 158.9
Adjusted profit m 26.1 126.0 147.3 111.2
EPS adj ¢ 2.3 10.9 12.8 9.7
EPS adj growth % -27.1 382.6 16.9 -24.5
PE adj x 24.0 5.0 4.3 5.6
Total DPS ¢ 0.0 3.2 3.0 2.9
Total div yield % 0.0 5.8 5.6 5.4
Franking % nmf 100 100 100
EV/EBITDA x 4.9 2.2 1.8 1.6
GCFPS ¢ 5.5 14.5 16.5 13.9
PGCFPS x 9.9 3.8 3.3 3.9
Net debt/equity % -8.0 -17.6 45.8 228.4
Price/book x 1.1 0.9 0.8 0.7
*All values are in AUD unless otherwise stated.
Source: Company data, Macquarie Research, Jan 2012.

Source: FactSet, Macquarie Research, January 2012
(all figures in AUD unless noted)