murchison metals limited

Murchison Metals Limited

27.07.2011 06:04 PM

Despite Wednesday's 7.4% gain Murchison Metals (MMX) has been punished by investors in recent times, dropping 66% over the past 12 months as the company has been in turmoil with management changes, cost blowouts and a cloud hanging over not only its Oakajee Port and Rail project, but the viability of the entire business. Brokers have been quickly shifting their recommendations on the stock to a sell, with Citi downgrading MMX to a sell following the release of a feasibility study for the Oakajee project. UBS joined in the party, slashing its target price by 77% to just 70 cents.

The biggest news is the cost blow-out and funding issues, which is leading MMX to consider all options to survive. The Perth-based miner admitted that it faced serious financing challenges to meet its funding commitments, and is struggling to secure loans. It will even consider selling its flagship iron ore mine to pay for the over-budget and late Oakajee port and rail development.

Independent analyst Peter Strachan said Murchison would most likely reduce its 50 per cent interest in Oakajee Port and Rail (OPR), its joint venture company with Japan's Mitsubishi. "The company has already moved down the path of selling some or all of its interest in OPR," Strachan said. Strachan pointed out that Murchison was a small company and couldn't finance half of a $6 billion project on its own.

The cost blowout was revealed in a feasibility study for the infrastructure development showing a 24 per cent cost increase to $5.9 billion, along with a blowout for its Jack Hills mine expansion in the Mid-West. This compares to an estimate of $5.24 billion in November and an original costing of $3 billion in March 2009. The combined projects will cost a whopping $10bn.

The future of Oakajee had already come under a cloud last month when state-owned Chinese group and would-be Oakajee customer Sinosteel mothballed its $2 billion Weld Range iron ore project.

CEO Greg Martin told a teleconference that the miner would consider all options to fund the Oakajee project, north of Geraldton in Western Australia, including selling its $3.7 billion Jack Hills iron ore project. "There is no doubt that Murchison finds itself in a very challenging environment," said Martin, a former AGL Energy chief. "All options are on the table for consideration as part of this process ... nothing is sacred or sacrosanct."

It has been rumoured that MMX is now looking for a buyer, approaching the Foreign Investment Review Board for a briefing to try to push through approval for a takeover. China's Sinosteel had attempted a takeover back in 2008, but Wayne Swan put a stop to that. It seems these truly are desperate times for MMX, and while a takeover from Sinosteel or another suitor would see the stock jump, the risk of another rebuttal from Swan means that there is still plenty of downside risk. Any investment in the stock is a pure gamble.