iron price, page-64

interesting article in The Australian on mgx earlier this year

Take care until iron settles
THE AUSTRALIAN FEBRUARY 11, 2014 12:00AM

Barry FitzGerald
Resources Editor
Melbourne

West Australian producer Mount Gibson is seen as providing the best near-term protection against any price slide. West Australian producer Mount Gibson is seen as providing the best near-term protection against any price slide.

NO one really knows where iron ore prices are headed until the masses in China get back to work after the country’s prolonged new year celebrations.But with the surge in supply about to hit from expansions in Australia and elsewhere, there are now more pundits calling iron ore lower from its current $US120 a tonne than there are calling it higher.
Given it is simply un-Australian not to have some iron ore exposure in the portfolio, it could well be time for investors to at least move their exposure to a more defensive position in the biggest of our commodity exports.
The big three of the Pilbara - Rio Tinto, BHP Billiton and Fortescue - are also the lowest-cost producers. So they have the best defence against what most see as the inevitable retreat in iron ore prices from last year’s average of $US135 a tonne to a long-term (real) price of $US80-$US90 a tonne. But their exposure can be less than pure (BHP and Rio), and they have much work to do to get their debt down to more manageable levels in the event there is an early and sharp retreat in prices.
That latter point applies to all three of them, as they hold a collective $US60bn in net debt which has to be both serviced and substantially reduced in the looming lower iron ore price environment if they are to live up to their chants about increasing rewards to their owners, otherwise known as shareholders.
So while their low costs of production will serve them well in any significant iron ore price retreat, there are limits to their defensive qualities.
Same goes for Mount Gibson (MGX), the Mid West and Kimberley iron ore producer in Western Australia. Its costs are higher than the big three and the life of its mines does not match their multi-decade stuff.
But with the rising chatter that iron ore prices will retreat significantly this year, Mount Gibson is increasingly being talked about as providing the best near-term protection to any iron ore price slide. The reason is simple. It is sporting a cash balance of $484 million (44c a share) and carries negligible debt.
It has been paying 4c a share annual dividends ($43m) for yonks, which on yesterday’s market price of $1.04 puts it on a yield of 3.8 per cent. Some analysts have been tipping an increase in the annual payout to 7c a share to absorb some of that cash hoard. That might prove to be a bit excitable considering Mount Gibson clearly needs to spend on extending its life as an iron ore producer.
But the point is made that the current dividend flow looks rock-solid at this point.
The group’s strong cash position has nevertheless got some worried that there are risks around potential merger and acquisition activity in the pursuit of a longer life as an iron ore producer. On that score, Mount Gibson has shown a preference for bite-sized acquisitions which can leverage off its infrastructure in the Mid West. Not much risk with that approach.
And if the iron ore price slide were to eventuate, the company would be knocked down in the rush by any number of distressed juniors looking to cut a deal on iron ore assets that they never managed to get into production during iron ore’s price heyday.
Mount Gibson’s buying power under such a scenario would be a multiple of what it is now, making the push for a longer life all that much cheaper and less risky to achieve.