huntley upgrades mgx

Buy upto 0.85
Acumm upto 0.95
Hold upto $1.25
Reduce upto $1.50

Following on from our special report in YMW12, we have significantly upgraded our iron ore price forecasts from FY08 to FY11 as per the table. Previous expectations were for a 17% decline from April 2008. We now forecast a 5% rise to US108c/dmtu or ~US$68/t for lump due to strong Chinese demand and an expected reduction in Indian supply. The straight line decline to long term prices is retained but now extends from April 2009 to April 2012 compared to April 2008 to April 2010 previously. Our MGX valuation benefits strongly, rising from 60c to 95c a share, demonstrating the single commodity leverage. Long term assumptions remain US50c/dmtu or ~US$31/t for lump iron ore, an A$/US$ exchange rate of 0.76 and a 10% discount rate.

Our FY07 NPAT forecast declines marginally to $36.8m. The poorer than expected 1H07 results is partially offset by the deferral of profits into 2H07 due to inventory build and higher iron ore prices from April 2007. Recent A$ strength drags on earnings. FY08 NPAT rises significantly to $80m with higher prices and the addition of Koolan Island ore in our forecast for the first time. EPS falls slightly to 10c due to dilution from the AZR acquisition. Our recommendation is upgraded from Hold to Speculative Buy due to the buoyant outlook for iron ore, the increased valuation and a lack of established pure conventional iron ore mining peers. The speculative tag reflects development and high operating costs. We would like to see management bring cost inflation under control. MGX has underperformed but improvement is expected.


First ore from Koolan Island is due mid 2007. The new mine should lower the overall risk profile by providing a second independent source of income. Koolan Island benefits from direct shipping from the adjacent loader. There is no risk of intermediate rail transport creating bottlenecks. The ship loader has significant excess capacity which positions the company to capitalise on exploration success. Recent results from a 9400m drill program provide encouragement. Resource upgrades are expected.


Headline 1H07 NPAT of $27.4m was 24% ahead of 1H06. The result was boosted by a non recurring $18.7m after tax profit on the sale of Asia Iron. Adjusted NPAT of $8.7m was well below the pcp result but better than the poor 2H06. Adjusted profit fell short of September 2006 guidance of $15-18m. Selling prices rose from A$42.22/t in 2H06 to $61.54/t in 1H07 but were less than expected. MGX offered customer rebates to cover increased shipping rates out of Geraldton. No discounts have been offered since November. Operating cashflow was weak at negative $3.3m due to increased waste stripping costs and inventory build. The balance sheet remains sound with only $15.5m net debt. No dividend was declared. Inventory built significantly in 1H07 with only 1.1Mt of ore shipped compared to 1.8Mt of ore mined.