Pellet Price, page-237

I am not sure what everyone is so worried about. I think you are getting distracted by the share price movement and ignoring or forgetting some of the facts that we do know. Someone could be selling for any number of reasons. At any time the share price is just where the marginal buyer and the marginal seller intersect. The share price does not equal the value of the company. As Buffett says, "price is what you pay, value is what you get".

Yes the share price is down 15% from the recent peak, but it is also up 50% from October. I really don't think the fact that there has been about $1m of shares sold over the past few days at a slightly lower share price means much.

We do not have perfect information but let's recap on what we do know:
- There were +/- 700K pellets shipped in the December 17 quarter
- There were +/- 110K pellets shipped in the first week of January 18
- Therefore total pellets shipped in this 3 month and 1 week period were around 810K pellets
- Inventory as at 30 September 17 was 240K pellets
- Production for the December quarter should have been around 600K pellets (my estimate, less than 550K would be disappointing and greater than 650K excellent, maybe one day we will get to 700K)
- Therefore inventory as at the end of the first week of January would have been minimal (240K + 600K - 810K = 30K plus or minus)

I am slightly surprised by the delay in a new ship arriving at the Port, but only by a week or 2. There could be a number of reasons for this and I don't see the point in speculating.
It is weird that Golden Eminence was scheduled and then stopped and it is weird that Super Grace seems to be on its way to Port Latta on one part of MarineTraffic but is not listed on the Port Latta arrivals, but there seems to be an error in the database as Port Latta is listed as not recognised. If Super Grace does arrive late January I really wouldn't lose sleep. By then maybe 250K pellets should be in inventory, not a huge number, and 80K will then be loaded.

I don't think the fire is a big deal. Yes it probably caused a few day delay in loading the ships, but 2 ships have been loaded and set sail since the fire (Zhe Hai and Mehnet Aksoy). Maybe they had to do temporary repairs and then did a more permanent fix after these ships were loaded (I have no idea), but the fact is the damage could not be too significant if 2 ships were loaded successfully. In addition, if there was a material issue we are talking about an ASX listed company with disclosure obligations. I agree disclosure is far from perfect by I don't think historical disclosure has been misleading or nefarious.

In terms of price received for our pellets there is enough public information to suggest Grange should have received US$100 plus/ ton (I am hoping for higher). I wouldn't stress about the price received for the December quarter. Your view on the sustainability of the iron ore price and pellet premium is up to you to decide and is the more substantive issue. My view is that the environmental policy changes in China will drive a structural increase in the pellet premium compared to historical levels. Over the past few weeks the pellet premium does appear to have weakened a little and the AUD has strengthened, neither of which are favourable for Grange, but we are still in a very healthy price environment.

It is worth looking at the disclosure of Ferrexpo, a Ukrainian pellet producer listed in London. Their disclosure is quite good and has some useful information on their website. On 9 January 2018 Ferrexpo gave a trading update which included a comment that "The Group's average price received in 2017 increased significantly compared to 2016, reflecting a 22% increase in the average 62% Fe iron ore fines price and a notable increase in the pellet premium due to strong demand for high quality iron ore products including pellet". You can be as skeptical as you want about the Board and management of Grange, but our pellets (when produced) are clearly high quality and I cannot see why there would not be strong demand for them from our major shareholder and others.

Re my initial comments about the recent decrease in the Grange share price not necessarily being a material indicator, it is worth noting Ferrexpo's share price has increased 15x over the past 2 years. It also fell 25% between September and December 2017. Share prices do not move in straight lines. Also worth noting Ferrexpo is a controlled entity (like Grange). It does not mean minority shareholders cannot do well, so long as the Board and management act in the interests of all shareholders.

Grange's cash has been consistently maintained at around $150m over the past years and dividends have been paid with excess cashflow. You can argue whether $150m is required and whether a lower amount could be retained (and whether any money should be spent on Southdown), but the approach of the Board has been consistent. As I have said in other posts the bigger issue is how much cashflow is still required to maintain mining and production levels. If I can make one suggestion everyone should contact the company to press the Board and management to improve disclosure to all shareholders on future capex requirements and make their dividend policy clear. As I have said previously, it is not clear to me the controlling shareholder is incentivised to maximise the share price of Grange. However they receive their pro-rata dividends like all of us and they seem to be sensible and commercial in this respect. They also seem to be pretty switched on (pun intended) - remember they invested in Global Switch in 2016 partnering with some highly regarded investors including Rueben Brothers. Grange is pretty small in the scheme of our parent group (which is good and bad in my view).

In summary I would not get so stressed about a 3 cent fall in the share price on relatively modest volume. Many of us seem to have taken the opportunity to add to our investment at what appears to be an attractive price. For every buyer there is a seller and for every seller there is a buyer.

Let's hope Super Grace is on its way to Port Latta and arrives pre the end of January, and another ship is scheduled in the near future. Let's also hope that we get a good quarterly report next week or the week after. Let's hope the share price starts to reflect fair value. Rather than hope, let's all communicate to the Board and management that we as shareholders want greater clarity on future capex requirements and dividend policy. There is clearly room for improvement in terms of communication to the market and shareholders. Some encouragement on areas to improve cannot hurt.

Just my opinion
Monty