grange $200 million in the bank by june... buy

Analysts are quick to slap a BUY on Grange today after the completion of the IODEX pricing mechanism and with another US$70 million to add to the current $100 million in the bank. Grange will comfortably have $200 million in the bank by June.
What a nice increase today, the start of many I'd say.

Merrill Lynch
Grange BUY

$70m revenue & NPAT windfall in 1H11
Grange has announced a successful negotiation of the iron ore pricing mechanism to be implemented into contracts with customers Bluescope Steel and Shagang. Shagang off-takes ~1.3mtpa and BSL ~0.8mt, although the BSL contract is due to expire in 2012. The agreement will be applied to all future shipments, but, importantly for Grange, it will be applied to all sales in the interim pricing period from 1 April 2010 to 31 March 2011. Subsequently, a retrospective one-off interim adjustment payment of US$70m will be received by Grange to reflect the difference contract value. We expect that the US$70m, if offset with the tax losses obtained from the Southdown consolidation, will result in an increase to NPAT of approximately the same amount.
Pricing mechanism captures benefits of high-quality ore
Grange is uniquely positioned in that they sell high-quality magnetite ore in pellet form. The ore at extraction contains only ~51% Fe. The pelletization process (although more expensive) concentrates ore to ~65% Fe - the grade sold by Grange and now incorporated into the pricing mechanism for Bluescope and Shagang. The agreed pricing mechanism adopts the daily Platts Iron Ore Index price ("Platts IODEX") for 62% grade Fe. The revenue price received by Grange will be adjusted to 65% and will carry an additional pellet premium (10-15%).
Margin expansion story to unfold in 2011
In 2011, with the newly negotiated pricing mechanism in place, we should expect to see the margin expansion story unfold. The current IODEX price for Fe 62% pellets is over US$200/t, and with adequate cost controls in place ($40m of costs stripped so far), we expect that margins will begin to expand. This translates to higher EBITDA and higher NPAT. With a stable balance sheet (cash ~$100m), and FCF uptick in 2012, we expect Grange to generate a FCF yield of >20%.