Morningstar's Recommendation: Gindalbie Metals...

Morningstar's Recommendation: Gindalbie Metals Ltd

Recommendation: Under Review

Gindalbie Metals is an iron ore mining company based in the midwest region of Western Australia. Its principal asset is a 48% stake in the Karara Mining Limited, or KML, owner of the Karara iron ore project. The other shareholder in KML is Ansteel, one of China largest iron ore and steel producers. Production of hematite ore started in March 2011 and has been supplemented by magnetite concentrate production since October 2012. Total attributable iron ore production is expected to reach 5 million tonnes a year during fiscal 2014.

Event25-Oct-2013

Business Impact:

Forecast Impact: --

Recommendation Impact: --

Event Analysis
Ramp-Up of Gindalbie's Karara Mine Continues
Combined production of magnetite and hematite at Gindalbie's 48%-owned Karara mine increased 23% in the September quarter, reaching 6.8 million tonnes on an annualised basis. However, despite progress, the mine is well behind schedule. A little under a year ago, management indicated annualised magnetite production alone would reach 8 million tonnes by now, yet it's currently just 2.7 million tonnes. Management expects magnetite production of 1.5 to 2.0 million tonnes in the December half, implying annualised rates will increase sharply this quarter to 4.3 million tonnes, with the rate of hematite output stable. We have little confidence in current guidance, particularly for cash costs, given the track record of unreliable guidance. Gindalbie won't release realised cash cost information for Karara until it reaches steady-state magnetite production rates of 8 million tonnes per year. However, without knowing the ultimate level for cash costs, and with a strong likelihood Karara's operating and financial leverage will be high, we consider the fair value uncertainty to be extreme so do not provide a fair value estimate at this stage. Management still expects Karara to be cash flow positive in early 2014, but given the risks, we await evidence of such before incorporating into a fair value estimate. With finances at Karara stretched, there is little room for further disappointment. The failure to sustainably produce the promised 68% concentrate grade is a lingering concern. However, we maintain our view that Gindalbie has no sustainable competitive advantage or economic moat, as margins are likely to be well below the industry average. We expect returns on invested capital to be very poor due to the high up-front capital cost to build a magnetite iron ore mine.