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 $20m from management fees and royalty flow. Despite the recent jump in share price we maintain our buy recommendation noting medium risk due to single commodity exposure with revenues leveraged to the iron ore price cycle and currency. 0 10 20 30 40 50 60 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Volume (m) 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 Price ($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. This report is published by SHAW Stockbroking Limited (“SHAW”) in good faith based on the facts known to it at the time of preparation and does not purport to contain all relevant information in respect of the Financial Products to which it relates. Any projections are estimates only and may not be realised in the future. SHAW has prepared this report for multiple distribution and without consideration to the investment objectives, financial situation or particular needs (“Objectives”) of any individual investor. 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MGX Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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