a fundamental question

I have reposted my Jan post on MGX outlining why I consider MGX to be a worthy inclusion in a mining portfolio.....the below post was from 18th Jan 05 when MGX was trading at 40c a share.

Despite the market cap rise, I wonder if MGX is actually better value NOW than back then, especially given the 71.5% price increase and the ramp in production forecast.

Interestingly, Shaws have also increased their valuation of the company by almost 100% in this time.

I hold 250k MGXO with a price target of MGX $1.50 by option expiry.

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I have spent sometime researching MGX and the iron ore market and have come to the conclusion MGX remains a strong speculative buy at current levels and will continue to trade strong. I thought I'd highlight some points about the company and ask feedback from others who follow the stock.

Positives for MGX:
1) Iron ore is a growth market largely fuelled by China. Chinas demand for iron ore has doubled over recent years and is expected to exceed Australia's entire production capacity in the next few years and demand will more than quadruple by 2025. Those forecasts are relying on China successfully maintaining its "one child policy" to curb population gowth (which would push demand higher if it failed). Australia is geographically closer to China than any other major iron ore producing country, and thus we have a competition advantage within this market.

2) The Chinese are aware of this advantage and there has recently been a spate of JVs, MOUs, and share buying by Chinese contruction companies seeking to hedge their positions.

2) Unlike other speculative mining plays such as FMG (which itself has taken a vertical increase in share price from 50c to $3 in a space of months), MGX is shipping iron ore now, earning cash now, and has thus proven to the market their plans are not just a pipe dream. Recent announcements have exceeded forecasts.

3) MGX has an excellent profit outlook. At current share price levels projected 2005/6 production will give the company a P/E of around 4. Cleary if this forecast is met MGX is likely to be trading closer to the $1 level for still below market P/E of 10.

4) MGX has clearly been conservative with iron ore price expectations in their profit forecasts...the bugeted 7.5% increase 2005/2006 is well below the rumoured 50% increase that RIO are currently negotiating. Once negotiations are complete (likely to be +30-40% it is a sure bet MGX will have an opportunity to release a price ramping forecast revision and add millions straight to their bottom line.

5) I believe there are likely to be more positive company announcements than negative in the comming months. I base this on the likely profit forecast upgrades that will stem from many expected market movements including: the increasing price of iron ore; the weakening of the Australian dollar; further production ramps; further JVs with Chinese construction companies and investors worried of being hit by the fast rising cost of ore and seeking a hedged position; a possible takeover oppourtunistic take over bid.

6) Excellent leverage oppourtunity with MGXO, in the money trading with a cheap time decay premium they are well worth considering.

8) MGX seems determined to deliver revenue. Their recent JV with Asia Iron cleverly provides a solid revenue stream in their new magnetite project without the capital risk via their indexed management fees and direct shareholding. This could be worth more to the bottom line in the next 2-3 years than their current Tallering Peak production shedule.

9) Shaw stock broking rates MGX a strong buy with a net present value of 61c a share. They make some compelling arguements.

10) It is speculated the next big push for iron ore may come from India, which has a population (if there was rapid development such as in China) that would continue the shortage of iron ore for decades to come.

Negatives:
1) There is soverign risk to a marketing plan aimed a sole country (China). In the event of catastrophe, war, or otherwise Chinas development would slow.

2) Many other companies are racing to ramp production of iron ore which could possibly cap prices in the medium term

3) MGX has had a history of underperforance at the management level, which has kept the shares trading below fair value.

4) MGX have had trouble with their australian provided rail system which has impacted profits, although this appears to be improving. The recent announcement "Gains access to major Chinese Railway Group" shows management are thinking outside the square and further that the Chinese are serious about their investments in Australian iron ore.

I am not sure where MGX is headed short term, from day to day, I'll leave that for the chartists. I do believe that the fundamentals of this company are strong enough for it to continue its medium to long term bull run. I hold MGX and MGXO and will continue to on the basis they remain excellent value.

I also believe strongly in competing iron ore miners such as FMG which have amazing potential or greater order of magnitude than MGX, but for my money I'd prefer to invest it in a company that is DOING and EARNING rather than dreaming and planning of bigger and better things. At the end of the day its about making money, and investing in companies with strong fundamentals both now and in the future. I'd appreciate any opinions about what others think and hope it generates some discussion.