This is an important month for Mount Gibson Iron Ltd (MGX) because Chinese steel manufacturer Shougang has until April 30 to decide whether to participate in the Extension Hill magnetite project and become a 50/50 JV partner.
If it eventuates, and is highly likely as the feasibility study is looking good, MGX ownership will be diluted to about 37.5 per cent and Shougang will take a 15 per cent interest in MGX at 75c and will be required to inject $174 million into the project.
Shaw Stockbroking suggests Mt Gibson stock is a buy, saying that in light of the very tight WA labour and construction market it believes it is unlikely the company would commit to development within the next six months and will not do so until it can lock in a fix price offtake agreement with its JV partner to offset the substantial capital risk.
The broking firm believes the group/JV aim is to progress the project to a point where it is ready to hit the go button when a cool-down in the WA construction market appears and fixed contractors' costs can be locked in.
Concurrently or pre-empting this development may be the commencement of construction of the Nanjing pellet plant, which offers strong margins in the current environment even if feed is sourced from third parties.
Meanwhile, Mount Gibson announced it has settled a dispute with its crushing contractor and has subsequently purchased the equipment.
Whilst no details were divulged analysts believe the cash outflow to MGX is a couple of million dollars.
The next and more important item announced was the arrival of 34 rail wagons which will enable the group to complete its production ramp up to three million tonnes per annum (mtpa).
The wagons are undergoing commissioning and should be in service from late April.
SHARE PRICE MOVEMENTS
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Shares of Mount Gibson on Friday edged up 1.5c to 83.5c. Rolling high for the year has been 90c and low 43.5c. At one stage the Ferret drew traders' attention to the company's ties with the Chinese when the shares were selling a little above 20c.
Mount Gibson has purchased the crushing facility and associated plant and equipment at its Tallering Peak operations from Rapid Crushing and Screening Contractors (Rapid).
The purchase of the facility reduces the risks associated with installing a replacement contract crushing plant as the operation moves to 3mtpa production rates.
The purchase of the crushing facility has significant operational and financial advantages to any alternatives available within the current industry environment.
All disputes between Rapid and MGM have been resolved.
The Tallering Peak rail wagons, due for delivery from China, arrived in Geraldton on March 13.
The 32 wagons are currently undergoing operational readiness testing and will be available for haulage in late April as scheduled.
Mount Gibson Iron reported a net profit after tax of $22.1 million for the six months to December 31.
It was the first time International Financial Reporting Standards were applied to the company's results.
The company has recently developed a sustainable life of mine operating plan for the Tallering Peak hematite operation, which involves the development of the T6 orebody and a major cutback of existing pits.
As previously reported in December, a consequence of the cutback and the development of the T6 pit will be reduced ore production and grade for the six months to June, which will affect both cash flow and profitability for the period.
However, as a result of recent developments, the Tallering Peak operations will be in a position to achieve the forecast production rate of 3mtpa from June and will be well positioned to take advantage of increased production volumes whilst iron ore prices remain historically high.
BACKGROUND
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Mount Gibson Iron was established as a specialist iron ore exploration company in 1996 and listed on the Australian Stock Exchange in January 2002.
It was formerly Whittakers Ltd.
A series of capital raisings since then have permitted the company to begin the progressive development of iron ore hematite deposits in the midwest region of Western Australia which it owns, controls, or over which it holds mining rights.
Mount Gibson's first mine at Tallering Peak commenced exporting direct shipping grade hematite to China in February 2004 and is currently operating at 2mtpa with plans to expand to 3mtpa by June.
The company's current focus is on the development of a mine at Extension Hill, in the Mt Gibson ranges, to produce 5mtpa of magnetite concentrate as feed for pellet production in China.
The company has a 71 per cent shareholding in Asia Iron Holdings Limited, a Hong Kong-registered company.
Subject to completion of a feasibility study and project financing will develop the Extension Hill mine in a 50:50 joint venture with the Shougang Group. Asia Iron will separately build and own a 2.5mtpa pellet plant in China
There are Tallering Peak (hematite) with a reported mine life of eight to 10 years; Mt Gibson (magnetite and hematite) on a 10-year life line and Koolanooka South.
Exports of the company's iron products will be made through the Port of Geraldton where a $100 million dredging and facilities upgrade is nearing completion.
MGX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)