expected price - 80 cents or 100% Shaws Document.Sorry, not the...

expected price - 80 cents or 100% Shaws Document.

Sorry, not the best copied from Egoli web site which is in Acrobat form. At the time of publishing Iron Ore prices were expected as per below however now strongly roumoured 25 - 40% and more line 30 - 35% led by RIO. Comments out of Shaws who are close to RIO say this values the compant at around 80cents. Either way sounds like MGX is undervalued but do your own research. Now the expect a higher Iron Ore Price it will be interesting to see if it is mentioned again in the morning meeting - 2 minute summary as it was on Wednesday when they expect 20% on Iron Ore..

Cheers

MOUNT GIBSON IRON (MGX) ABOVE EXPECTATION
Recommendation
Short Term: Buy
Long Term: Outperform

The market is likely to pay additional attention to MGX over the coming
weeks as iron ore price negotiations are finalised between industry heavy
weights CVRD, BHP & RIO with Northern Asian consumers. The attention
may be similar to how the market has been attracted to the coal minnows
following a sharp rise in coal price. Speculation remains for an increase in
iron ore price starting at 20%. MGX is also adding to this appeal by
increasing forecast sales volumes for a second time in four months. FY06 sales
are now expected to be close to 2.5mt. In addition the macro environment is
now conducive towards development of the group’s large magnetite deposit
(231mt). This could ultimately provide pretax profit of between $15m and
$20m from management fees and royalty flow. Despite the recent jump in
share price we maintain our buy recommendation noting medium risk due to
single commodity exposure with revenues leveraged to the iron ore price cycle
and currency.
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Price ($ps)
Capital Profile
ASX Code: MGX
Sector: Metals&Mining
Issued Shares: 311 million
Diluted Capital: 358 million
Dil Marketcap: $115 million
Net Cash* $6 million
Gearing na
Shareholders: Sinom 10%
*Includes Options Union Pk 5.9%
website: www.mtgibsoniron.com.au KEY POINTS
Our valuation is fully diluted for
options which are priced at 18c, 22c,
and 25c.
Tallering Peak mine is forecast to
cease production in 2010 with Mt
Gibson production to start 2011 for
modest capital cost of $10m to $12m.
o Production forecast includes ROM of 2.65mpta for sales of 2.43mpta. Mine
life of 10 years is expected from Tallering Peak and Mt Gibson. Our pre tax
NPV is now 61cps fully diluted or 49cps post tax. This is substantial increase
on our initial estimate based on a much better perceived outcome with iron ore
prices, a view the AUDUSD will remains around current levels as US increases
interest rates whilst Australian rates remain benign and the 25% increase in sales
volumes starting FY06.
o Option value for Magnetite: MGX has a substantial magnetite deposit. This
has been vended into Asia Iron Holdings (30% MGX). A concentrate piped to
Geraldton is forecast to feed two 2.5mpta pellet plants in China. Under the deal
MGX maintains a 30% interest (pre funding) in Asia Iron Holdings. Upside is
with management rights ($4/t) and royalties (25c/t) which could yield $15m to
$20mpa PBT. Currently MGX is to be a third party to financing as majority of
financing is to be done from Chinese side which should ultimately be driven by
Chinese off take contracts.
Forecasts assume a 20% increase in
iron ore from 1st April with A$
remaining around current levels. For
every 1c movement in AUD:USD
NPAT changes by approx $1.2m.
John Colnan
MGX($0.32) Yr to 30 June 2004E 2005F 2006F 2007F 2008F
Iron Ore Sales (M t) 0.4 1.9 2.4 2.4 2.4
Revenue (A$m) 14 69 98 108 103
NPAT (A$m) 1.5 13.8 29.6 29.7 23.7
-EPS (cents) 0.5 3.8 8.3 8.3 6.6
-P/E ratio 31.6 8.3 3.9 3.9 4.8
Cashflow post SIB Capex ($m) 1.4 17.4 34.2 43.5 37.7
-CFPS (cents) 0.5 4.9 9.6 12.1 10.5
-P/CF ratio 32.3 6.6 3.3 2.6 3.0
Dividend (cps) 0.0 0.0 0.0 0.0 0.0
Hematite Production and Cashflow Forecasts for Tallering Peak Mine and Mt Gibson Deposit:
MGX - Year Ending 30 June 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Assumptions
AUD:USD 0.69 0.76 0.78 0.73 0.70 0.70 0.70 0.70 0.70 0.70 0.70 0.70
Iron_Lump Price - (USc/dltu) 45.3 49.6 56.7 56.7 51.0 48.4 48.4 48.4 48.4 48.4 48.4 48.4
YoY Change 10% 14% 0% -10% -5%
Realised 45.3 48.1 52.7 53.8 48.4 46.0 46.0 46.0 46.0 46.0 46.0 46.0
A$ Equivalent 65.6 63.5 68.0 73.7 69.2 65.8 65.8 65.8 65.8 65.8 65.8 65.8
Iron_Fine Price - (USc/dltu) 35.1 38.4 44.1 45.0 40.5 38.5 38.5 38.5 38.5 38.5 38.5 38.5
Realised 33.0 37.2 41.0 42.7 38.5 36.5 36.5 36.5 36.5 36.5 36.5 36.5
A$ Equivalent 47.8 49.2 52.9 58.5 54.9 52.2 52.2 52.2 52.2 52.2 52.2 52.2
Tallering Peak Mt Gibson
Rom Production (kt) 0.55 2.00 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60 2.60
Recovery 95% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90% 90%
Contained FeO (kt) 62% 62% 63% 64% 65% 65% 65% 62% 63% 64% 64% 64%
Lump Split 67% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%
Lump 0.259 1.170 1.521 1.521 1.521 1.521 1.521 1.521 1.521 1.521 1.521 1.521
Fine Split 33% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39%
Fine 0.128 0.702 0.913 0.913 0.913 0.913 0.913 0.913 0.913 0.913 0.913 0.913
Total Sales (mt) 0.387 1.872 2.434 2.434 2.434 2.434 2.434 2.434 2.434 2.434 2.434 2.434
Average Price Achieved A$/t 36.5 36.9 40.2 44.6 42.5 40.4 40.4 38.5 39.1 39.7 39.7 39.7
Sales Revenue A$m 14.1 69.0 97.8 108.5 103.4 98.2 98.2 93.7 95.2 96.7 96.7 96.7
Costs
Mining (A$/t) 10.0 11.25 10.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00 11.00
Crushing (A$/t) 4.0 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00
Transport (A$/t) 8.0 8.00 8.00 8.00 8.00 8.00 8.00 12.00 12.00 12.00 12.00 12.00
Royalty (A$/t) 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50
Total Cashcost (A$/t) 24.5 25.8 24.5 25.5 25.5 25.5 25.5 29.5 29.5 29.5 29.5 29.5
Total Cashcosts (A$m) 9.5 48.2 59.6 62.1 62.1 62.1 62.1 71.8 71.8 71.8 71.8 71.8
Site EBITDA (A$m) 4.6 20.8 38.2 46.4 41.3 36.2 36.2 21.9 23.4 24.9 24.9 24.9
D&A (A$/t) 2.5 2.5 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
D&A (A$m) 1.0 4.7 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9 4.9
Site EBIT 3.7 16.2 33.3 41.5 36.5 31.3 31.3 17.0 18.5 20.1 20.1 20.1
Capex 1 1 1.7 1 1 1 8 4 1 1 1 1
Cashflow 3.6 19.8 36.5 45.4 40.3 35.2 28.2 17.9 22.4 23.9 23.9 23.9
Discount Rate 9.0% 1.00 1.08 1.17 1.28 1.39 1.52 1.65 1.80 1.97 2.14 2.33 2.54
DCF 18.5 31.2 35.6 29.0 23.2 17.0 9.9 11.4 11.2 10.2 9.4
NPV - Pre Corporate & Tax 206.5
NPVps 0.61
Corporate
Interest 0.40 0.40 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Corporate Overheads 0.80 1.10 1.21 1.33 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Exploration etc 1.00 0.90 1.70 0.50 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
PBT 1.5 13.8 30.3 39.6 33.9 28.7 28.7 14.4 15.9 17.5 17.5 17.5
Tax Accounted 0.0 0.0 0.7 9.9 10.2 8.6 8.6 4.3 4.8 5.2 5.2 5.2
Tax Paid 0.0 0.0 0.0 0.0 0.0 18.8 8.6 4.3 4.8 5.2 5.2 5.2
NPAT 1.5 13.8 29.6 29.7 23.7 20.1 20.1 10.1 11.2 12.2 12.2 12.2
Corporate Cashflow -2.4 -3.0 -1.9 -2.6 -21.4 -11.2 -6.9 -7.4 -7.8 -7.8 -7.8
Discount Rate 9.0% 1.00 1.08 1.17 1.28 1.39 1.52 1.65 1.80 1.97 2.14 2.33 2.54
DCF -2.2 -2.6 -1.5 -1.9 -14.1 -6.8 -3.8 -3.8 -3.7 -3.4 -3.1
Corporate & Tax (A$m) -46.7
Cash from Options less debt 6.2
NPVps -0.12
MGX NPV cps 0.49
Project Magnetite
Beyond hematite production MGX is looking at unlocking the value of its sizeable high quality magnetite
resources. The group has access to over 230mt of magnetite of which 165mt sits within the Measured
Category. Realising its limitations and risks of pellet market the group has created a separate structure by
which to assist developing the project as illustrated below.
MGX 30% Asia Iron
100%
Manager 50% 50%
Mount Gibson
Mining Ltd
Magnetite Long Tan Pellet
Project
Hematite: Koolanooka
Tallering Peak Wolla Wolla 50% 50%
Mt Gibson Manager
Koolanooka
Nanjing Iron &
Steelgroup.
The current proposal is for production of 5mtpa of magnetite concentrate, slurry pipeline to Geraldton then
direct shipping to Chinese pellet plants. This is to be done in smaller vessels suitable for both Geraldton
port and up river transport (450km) to Long Tan which then avoids expensive double handling. Two
2.5mpta pellet plants are to be built across river from the Nanjing Iron & Steel steelworks at Long Tan.
Mine construction is scheduled to commence 4Q05, commissioning 12 months later. Commencement of
the second pellet plant is to immediately follow the first, once in operation. The Australian side of the
development is forecast at A$260m while the two plants in China are forecast to cost US$75m (A$110m).
The project includes rights to the magnetite ore passing to Asia Iron Holdings (revert if no development is
forthcoming prior to 2009). Asia Iron Holdings is responsible for funding the development. MGX can
maintain a 30% share in Asia Iron Holdings moving forward if it elects participate in any raising in Asia
Iron Holdings on a pro rata basis. In addition MGX maintain a 25c/t concentrate royalty and a
management fee of approx $4/t of concentrate.
We continue to await more details and as yet assign minimum value to the project. The final value of the
project and annuity stream back to MGX could be worth up to 50cps. Thus an option value of 5c may be
appropriate until the JV secures the long term off take contracts it requires to finance development.
Contracts based on mid cycle pellet price (ie US$70/t) are likely to be sufficient to underwrite
development. Current pellet prices are approximately US$100/t however we do note this is close to top of
cycle. Regardless CVRD’s, RIO’s & BHP’s hold on the seaborne traded iron ore market should spur
many steel mills into diversifying and growing supply.
Advantages of the structure include moving the funding burden to third parties and aligning funding with
the end user. Allowing MGX to generate a strong annuity income via management fees and not worry
about the pellet price cycle. In addition the capital cost of the pellet plant in China is expected to be
US$75m as opposed to an estimated US$250m if located in Australia.
Iron Ore Industry Overview – Hematite v Magnetite
The enormous iron ore industry of Australia feeds the steel furnaces of Asia. Australia currently produces
19% (200mt) of the world’s iron ore but importantly approx 33% of the globally traded export market.
Rio Tinto and BHP Billiton control most of this production. The majority of Australian production is
sourced from oxides being hematite & goethite. The only operational magnetite mine in Australia (for
steel making purposes) is Savage River, Tasmania (ABM Mining/Ivanhoe Mines) which currently
produces approx 2.5mpta of concentrate from 5mt ROM ore. The mine has been in production for approx
3 decades with mining and concentrating at Savage River, concentrate pipeline to the coast and pellet plant
at Port Latta. Additionally OneSteel is soon to develop a magnetite mine, concentrate pipeline and pellet
plant (50km west of Whyalla SA). This would allow OST to access is large magnetite resource (300mt)
and export surplus hematite ore.
Magnetite, an oxide of iron (Fe3O4), can be substituted for hematite (Fe2O3) or goethite (Fe2O3.H2O) for
the production of pellets or sinter to feed blast furnaces in steel works. Chemically, magnetite is
distinguished by having a higher iron (Fe) content (72.4%) in its molecular structure compared to hematite
(70%). Magnetite has the formula Fe2+Fe3+
2O4. The Fe ions occupy specific sites in the crystal structure.
The refining process (including flotation and magnetic separation) separates gangue (waste) minerals,
reduces volatiles and provides for less costly flux additions to the blast furnace. There is also a net gain
environmentally with a reduction in gas emissions - exothermic reaction, lower firing temperature (less
fuel) and maintenance costs. The overall net benefit by using magnetite for the production of steel is in
the order of a 5% for a blast furnace. However the offset is one or two additional processes before the
blast furnace.
Pellets
Globally over 220mt of pellets are manufactured either from hematite fines or magnetite concentrate.
Two thirds of this production is close to the steel mill or purchaser while 65Mtpa is traded.
Iron ore to steel process route
Processes Product Fe Content
(%)
1. Mining Run of mine ore
(ROM ore )
Hematite/Goethite/Magnetite Up to 64%
2. Milling Lump
Fines
Concentrate/Pellets/Sinter
60-70%
3. Pre-Mid Smelting Pig Iron, High grade pellets
Hot Briquetted Iron
80-95%
4. Smelting/Refining Metal: Cast Iron, Steel – Slab, Billet,
Hot Rolled Coil etc
98-99%
Additions: Coal for Coke (Carbon), Gas, Manganese, Flux’s (limestone or acid) etc.
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