Ann: Acquisition of Mid-West Iron Ore and Port Assets, page-83

I've been trying over the last few days to try and break the acquisition up into a few components to assess it better.

1 - Extension Hill - This is largely a dud and as JW stated was included as "part of a package" so was basically MGX rolling their rubbish into a transaction that FEX wanted. The impact of this is a cost of $5.1m that FEX inherits to rehab the site. FEX get the site facilities that Shine haven't been able to sell to anyone. I'd hazard a guess that this part of the deal is a massive dud.

2 - Port sheds - This is a good part of the deal. An immediate $5 / tonne C1 cash cost saving. Circa $6.5m pre tax saving or around $4.5m post tax savings. The Port sheds provide an option on hauling more bulk commodities, but questions marks arise over this. Do they have trucking capacity? I would say probably not, Iron Ridge has been a fairly constant operation so over expanding the haulage fleet would seem a silly move, so how much capex will it require to expand the haulage fleet? None of that is known yet.

3 - Rail sidings - They give good optionality but as per the webinar probably won't be used in the near term which for me is disappointing. Using the rail sidings as a shorter road haul destination with rail haulage for the remaining circa 100kms to the port, would reduce operating costs and increase the capacity of the road fleet without requiring as much capex.

4 - The above 3 don't really add up to the valuation of the acquisition so the balance is Shine. Shine is a high silica iron body. I have taken the below screenshot from an MGX presentation which shows their Koolan Island ore body. I have marked in blue where Shine sits in these 3 areas and also marked in purple where Iron Ridge sites (sorry for the child like drawings haha). Yes thats right, Shine isn't even on their chart for Silica, its around a 9.55% silica content which is huge and would result in a discount to any pricing. Blending could possibly improve this (being as Iron Ridge is low in silica).



I have also gone back to the only trading period that Shine was producing (the Jul-Dec 2021) half year, and the operational costs seems high. It isn't clear how much of this cost was whilst in C&M, but the Jan 22 quarterly activities report states that the quarter had a cash outflow of $5m so I will assume it was that $5m. Allowing for that and removing DD&A (as FEX's DD&A will be different) I get around about a cost per wmt of around $96 which isn't economical. I've calculated this all back from the Jul-Ded financial statements that show a loss for the mid west business unit of $59m EBIT (I have backed out all of the impairments etc, and have got back to a COS of $44.2m on a gross basis for 295k sales. I've adjusted down to $28.4m (which I used to calculate the above $96), by removing DD&A, the $5m above for C&M and the revaluation of the inventory from a prior period. For the record FEX is operating on a similar basis at $76 post the full acquisition of Fenix Newhaul (1st half of FY22/23), FY21/22 it averaged around $86, so Shine appears higher cost than Iron Ridge despite weaker grade ore.

I'll have a stab at a revised P&L assuming similar cost structures with 1m tonnes of Shine ore blended with 1.3mt of Iron Ridge ore, though the thing I'm mainly worried about here is that JW has spruiked an increase in production at Iron Ridge. If he does that, then that will lower Iron Ridge's mine life, and reduce the amount of time the 2 mines can operate in tandem, meaning that the 15mt of resources they have said Shine brings are unlikely to be fully mined unless they can source another high grade mine to replace Iron Ridge in the blending process.

I'll take a look at the revision of a consolidated P&L, but off the cuff this appears to be similar to the Fenix Newhaul acquisition. Strategically a good idea for an acquisition but at the wrong price. I suspect like Fenix Newhaul this acquisition will look overpriced.