perspective

shaws coments re mgx 1/4

MOUNT GIBSON (MGX)

March Quarter: MGX produced 392kt of hematite for the period however only shipped 145kt. This is some 200kt below expectation in addition the group announced its intention to ship 1.6mt for FY06 down from a previously stated 2.1mt. The result comes as some surprise however we note the Tallering Peak mine is undergoing a substantial cut back to get the main ore body into a life of mine pattern. This should be completed by June where access to high grade ore resumes.
MGX previously indicated it would ship low grade ore for the period as it mined the T5 ore body with some blending from the higher grade T3 pit. MGX note the very top of T3 is more shabby than expected (mined over the last two months) and rather than sell a low grade product will now stockpile and blend latter. Thus 2H production will only be 700kt v 1,100kt. NPAT (was pretax) drops from $40m to around $26m (MGX forecast on a roll over in iron ore price). Our $29m assumes a 10% increase for the June quarter. There is little change to our FY07 forecast however have downgraded production modestly from 2.9mt to 2.8mt. In addition mine life at Tallering Peak has been extended by 12 months as blended low grade ore comes through later. MGX is currently investigating bringing on the Extension Hill mine in by 2008 at 2mtpa (12mt current resource) however due to rail and port constraints we assume this comes in post Tallering Peak (ie 2013). Our current Hematite NPV drops 2cps. ie $1.02ps to $1.00ps. The new waste movement profile is similar to what we expected but with additional mine life. In addition we assume another 2 years from exploration.

Magnetite: The option with Shougang on Extension Hill Magnetite has pushed back to end of May. Disappointing however if iron ore price settle up closer to 20% then we believe Shougang (along with other Asian mills ) are likely to be more desperate to do a deal - time will tell. In addition MGX has said its equity level of participation is being reviewed. As we have said for some time capex is one number whilst off take pricing is the other. MGX most likely looking at risk v reward and not willing to invest huge amounts of capital unless suitable return is forthcoming and this is associated with obtaining a suitably priced off take agreement. Excluding magnetite MGX has the Nanjing pellet plant site fully permitted and construction could start quickly. The margin has always been making the pellets in China (very low capex & operating cost and substantial tax advantages than what can be achieved operating a similar plant in Australia) not mining magnetite. MGX looking at sourcing alternative magnetite and therefore may start the plant in China a lot quicker than we expect. We currently have zero value for this option (although forms part of our price target). Nanjing may be an option worth more than we expect noting Beijing clamping down on permitting new steel making capacity.

We continue to take the view that one is buying MGX backed by it hematite production with a free option on Extension Hill magnetite and/or Nanjing pellets. This compares favorably with many juniors who have large market caps ascribed for proposed magnetite projects.



KEY POINTS:

o June half continues to be a period of transition. Sales & NPAT downgraded.
o Little change to FY07 NPAT or valuation.