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Gindalbie: Keeping up with the Joneses
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Tuesday, 26 February 2008

WHEN the going gets tough, the tough go shopping. Just ask Gindalbie Metals chairman George Jones, who reckons he got a bargain yesterday by snapping up more shares in his flagship iron ore vehicle. The Metal Detective, by Stephen Bell
Despite the China-fuelled iron ore price boom, Gindalbie has suffered a six-month share price slump as investors query its $A1.8 billion Karara magnetite strategy in Western Australia’s Mid-West.

But yesterday it was a different story as the chairman pulled out his wallet.

Gindalbie jumped 11% as Jones spent around $800,000 buying another 1 million shares, taking his holding to 12.5 million, or 2.4% of the Perth-based group.

It was a timely show of faith by Jones, the former Portman chief, who has masterminded Gindalbie’s Karara strategy since joining the company in late 2005.

The message that ‘Gindalbie shares are too cheap’ will gain further traction this week when managing director Garret Dixon meets with institutional investors in Sydney and Melbourne.

Dixon will try to convince the Instos that his company has been unfairly maligned since it scrapped a proposed merger with Sundance Resources in October.

Despite yesterday’s rebound, Gindalbie shares are still down nearly 40% in six months, much worse than several other magnetite hopefuls.

Midwest Corp. shares have doubled in the same time, while Australasian Resources is up 45%. And Cape Lambert – which this morning announced the $400 million sale of its magnetite deposit to a Chinese group – is virtually unchanged over the six month period.

The share price comparison graphs don’t make a pretty picture for Gindalbie’s office walls.

They mock Jones’ long-held belief that Karara is Australia’s second-most advanced magnetite play, behind CITIC Pacific’s $5.2 billion Sino Iron project near Cape Preston.

Not even last week’s 65-71% increase in contract iron ore prices (yet to be agreed to by Rio Tinto and BHP Billiton) was enough to get the share price to budge.

It is not as though Gindalbie has been sitting idle, as it targets first hematite shipments in 2009 and first magnetite by 2010.

Two weeks ago, for instance, the company executed a subscription deal with its joint venture partner and 13% shareholder, China’s Ansteel.

The deal finalised the structure for the combined $534 million equity component of both the magnetite and hematite phases of the $1.8 billion project.

As part of the arrangement, Ansteel made its first $50 million subscription payment.

Gindalbie said the deal highlighted its “strong funding position”, enabling it to place orders for the supply of long lead time capital equipment.

The company aims to produce an initial 8 million tonnes per annum of magnetite concentrate and pellets from Karara and 3Mtpa of direct shipping ore from Mungada Hematite.

So why are the shares wallowing?

Part of the problem seems to be funding fears related to the current credit crunch.

This is despite Ansteel’s agreement to underwrite the debt and also Gindalbie’s equity share, if requested.

“The project is effectively bankrolled but we’re not getting any recognition for it,” said a Gindalbie spokesman.

Part of the Gindalbie share ‘discount’ is also due to environmental and infrastructure risks.
Last quarter the WA Government released its Strategic Review of the Banded Iron Formation Ranges, and suggested that up to 30% of the total number of ranges should be reserved.

And, in a shock to several rock kickers, the Government said it was not predisposed to the extraction of hematite in the area.

Nevertheless, Gindalbie believes that it can appease the green bureaucrats and has submitted a plan for the initial Mungada operation.

The state’s Environmental Protection Authority is scheduled to make its recommendations by June.

With critical hurdles looming, Perth broker Patersons Securities has been cool on Gindalbie since last August, when it slapped a ‘Sell’ on the stock.

There was some relief this week with Patersons upgrading the stock to a ‘Hold’ with a price target of 98 cents per share.

But the broker seems to be damning Gindalbie with faint praise, attributing its change of heart to the recent share price slide, alongside good returns forecast for the hematite project.

While the Ansteel deal bodes well for the quality of Gindalbie’s magnetite assets, “given Karara’s high operating costs we struggle to ascertain significant value based on our long-term magnetite concentrate and iron ore pellet price assumptions”, the broker says in its February Resources Review.

Part of the problem is infrastructure, as it is for every Mid-West hopeful.

With the debate continuing over Oakajee, Gindalbie has decided to use the existing Westnet railway to ship its concentrates to the port of Geraldton.

From there, they will be shipped to China via transportation on barges to a location off Geraldton for transhipment to Capesize vessels.

Transhipment is novel in the Western Australian iron ore context, but has been used for many years at One Steel’s Whyalla complex in South Australia, and will also be used by CITIC at Cape Preston.

It may increase handling costs for Gindalbie, and adds complexity to the simple ‘dig and ship’ formula beloved of investors.

But it has also given Gindalbie more control of its own destiny, as it tries to prove the doubters wrong.