Pellet Price, page-148

I agree with the positive sentiment but I think you are all a bit too focused on reported earnings and not economic cashflow. The prior reported C1 costs are completed distorted and do not reflect the current economical cost of production. I view C1 costs as defined as essentially meaningless “C1 costs are the cash costs associated with producing iron ore products without allowance for mine development, deferred stripping and stockpile movements, and also excludes royalties, sustaining capital, depreciation and amortisation costs”.

For me the key issues to look for in the next couple of quarters are not the reported EPS or the actual level of deferred stripping costs that are amortised, but how much cash still needs to go into stripping, plant and equipment upgrades, completing the tailings facility etc. Does anyone have a view on these issues? $80m has gone into capitalised deferred stripping alone so far. For example, I am less concerned about the time period for amortising this deferred cost and more concerned about how much stripping is still required on the upper East and West walls. When will the new SDTSF facility be permitted? Is there any risk it will not be operational by the time the current Main Creek Tailings Dam is full?

If the company was really trying to give clarity to shareholders and prospective investors then they would outline where cash has been invested over the past few years (tailings facility, mill and plant upgrade, pit cutback etc) and outline capex and production guidance for say the next 3 years. My hope is that the cutback, tailings facility and P&E upgrades are largely complete capex requirements over the next few years are limited, but I don’t know given the lack of disclosure. Anyone have a view?

I am not one for believing in conspiracy theories, particularly around trading in a given security. I think it is garbage when people post about the share price of a company being capped etc. Supply and demand wins in the end. However, just to throw something out there for discussion (I have no knowledge and am not asserting anything, just raising for discussion), it strikes me that Shagang doesn’t have a lot of incentive to maximise the share price of Grange through proactive disclosure. They already control Grange and if they have any intentions to buy out the minorities, a lower share price is to their advantage. Also the supply contract ends in 2022. At some point this contract will need to be extended, potentially requiring non associated shareholder approval. Supply of pellets is on arms’ length terms but I am sure Shagang will want to continue having access to Grange’s pellets. A full takeover offer would enable them to set whatever terms they wanted and would provide more flexibility for future dealings.

I note Shagang seems to have been prudent in the past and Grange has paid decent dividends. However if you form the view that Southdown is never going to get developed there is no need for Grange to retain the current cash balance, particularly if the capex for the tailings facility, cutback and plant upgrades are largely complete.

If Southdown is to be developed one day a higher Grange share price would be advantageous in raising more capital, although not necessarily advantageous to Shagang if they wanted to gain more control through a lower priced capital raising.

As an idea why not split Southdown into a new company separate from Savage River and distribute to shareholders (I appreciate this is going back to the structure in 2008 but things change over 10 years and Southdown looks highly unlikely to be developed from my perspective). Shareholders can retain an option on this project if they wish while the residual Grange can pay out a higher percentage of earnings/cashflow. $100m equity isn’t going to make or break the development of Southdown, but it is very material to Grange’s share price today. Imagine how Grange’s share price would react if the Board announced an in specie distribution of the Southdown project (through a Newco) and a dividend policy for Grange that all cash above say a $100m base amount would be distributed to shareholders through dividends, buybacks and capital returns (whatever is most tax efficient), particularly if they indicated future capex requirements for Savage River were limited.

Just my opinion/22c worth

Happy New Year to all
Monty