under valued, page-43

Hi Tokyo and disturbed and all
I read this from the AGO thread

Iron ore on another tear. MBIOI-62 up $2.60 to $59.22 after gaining $2.59 on Monday. +9.6% in 2 sessions.

In relation to disturbed's question - I assume you mean IO at 75 AUD not USD IO at 75 - so where we are now? Well if the price of current IO was maintained for another quarter I would value MGX at around 33-34 . The issue with MGX price is a lot of analysts have Medium to LT IO price as low as 27 and upto 45 . Nobody had 50, 55 or 60. When you put 27 or even 35 in your spreadsheet you end up with a cash flow negative figure and thus why some analysts have a low 20s price target - They discount cash by prospective cash losses and add closure costs on top. However if you change the IO input to 50 or 55 - then you have a reasonable positive cash flow and not only should cash not be discounted but one should add a few cents on top of existing cash . Then the story gets stronger when you assume in the first example you need to minus the costs of shutting down operations whereas in the second example this cost of shut down no longer is required.

Here is the part that results in analysts now being way off . For every month MGX produces profitably not only do you not have a reduction in cash but an increase in cash and a reduction contract liabilities - so the fact Citi for example has assumed a 27 IO price makes the valuation horribly wrong. So based on end of March quarter MGX is probably worth about 28.5 c which I derive from an estimated 32.5 c in cash minus liabilities . If however we make it to end of June and IO price has averaged 50-60 USD , then that valuation will be about 31 cents as cash would have around 33.5 c in cash but liabilities would only be about 2.5 making valuation higher by 2.5 c even though cash is only up by 1 c . So when IO goes up and stays up every week I celebrate that not only cash is increasing but also that the rail contact liability is decreasing.

Tokyo - I hope MGX do not chase a fad commodity - I would prefer they buy a good core commodity asset on the cheap rather the latest trend , being lithium now is akin to buying rare earth assets 5 years ago or uranium 8 years ago imho

In reality a good way to value MGX would be to use a mixed valuation approach which uses net cash minus liabilities ( 28.5 c end of March ) adds a weighted value of future short term cash flow about 2 c -3 c based on current IO and a probability weighted insurance pay out of 1-5-2.5c

So my actual current risk weighted valuation of MGX would be around 32-34 c as it stands today

However if they bought an asset that proves to be a great cash generator short to medium that can also grow in value - no reason MGX could not be a 60 or 80c stock in 1-2 years.

When they do pull the trigger on the acquisition( I think they will ) it will most likely rerate to around 28-30c . That is the stage whereby i will analyse whether to stay invested medium term or take my target 50%

Sorry for the long winded post and I hope some of it makes sense