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Morningstar's Recommendation: Gindalbie Metals Ltd

Recommendation: Buy

GBG is building an iron ore mine in the Midwest region of Western Australia. Principal asset is a 50% stake in the Karara iron ore project, a joint venture with AnSteel, China?s second largest steel producer. Production of hematite ore started in March 2011 with magnetite concentrate production expected by the September quarter in 2012. Attributable iron ore production run rates should reach 4.5Mtpa by 2013. The Karara project is well developed putting GBG ahead of Midwest peers. WA state government desire to increase Midwest iron ore production provides good support. Single commodity focus and exposure to Chinese steel demand makes this a high risk play only suitable only for risk tolerant investors.

Event13-Jan-2012
GBG released its 2Q11 activities report and cashflow statement. Construction of the Karara iron ore mine reassuringly remains in line with recent guidance. Mine and associated infrastructure should complete by mid 2012 with first iron ore concentrate shipments expected in the September quarter. The strong Australian dollar means additional debt funding of $150-$200m will be required - a small percentage increase relative the total $3bn capital cost. Despite a lack of new information, the GBG share price rose around 7% following the release of the 2Q12 update. The share price increase can be explained by: continued good progress at Karara; ongoing iron ore price strength; and recent strength in the wider stock market.

Business Impact: We expect much positive newsflow from GBG in 2012 as mine construction completes and magnetite shipments start. The Karara project will ‘de-risk’ as the year progresses increasing investor appeal and analysts valuations. At US$140 a tonne, the iron ore price remains well above our long term forecasts. At current levels, GBG should be capable of strong cash flow generation. The feasibility study for the Stage 2 expansion of Karara is expected mid year. Completion will provide more certainty regarding value accretion and could boost the share price. The FY12 financial result will have little significance with FY13 providing the first indication of Karara’s earnings potential. The 2Q11 report gives us no reason to change either our earnings forecasts or our valuation. At $0.58 a share our Buy recommendation is maintained. We expect the 1H12 financial result to be released on the 14th March.

Forecast Impact: --

Recommendation Impact: At $0.57 a share our Buy recommendation is maintained.