MGX (ASX) Iron ore macro analysis

Originally posted by ozpolarbear ↑

Hi guys,

I had started an iron ore sector macro analysis more than half year back. As mentioned there, those were however my thoughts on the iron sector since even much, much earlier and were forming since 2014. Much of my thoughts for the entire sector have materialized.

Around the time, I did an analysis of RIO, FMG and AGO to see the iron story from the point of the top tier (RIO/BHP), mid tier (FMG) and juniors (like BCI, AGO, ARI, MGX, etc)

FMG
http://hotcopper.com.au/threads/fmg-pros-and-cons.2548635/?post_id=15589127

AGO
http://hotcopper.com.au/threads/iron-analysis.2560938/#post-15710435

RIO
http://hotcopper.com.au/threads/rio-pros-and-cons.2550087/page-20?post_id=16782789

I listed a lot of pros and cons in these threads – more cons than pros – for the iron ore sector.

If anyone is interested in reading, then it might be beneficial to read FMG first (to get the broad idea as many factors affect most of the juniors too), then AGO and then RIO (From MGX’s point of view).

My number one point was simply macro fears – always been my biggest concern since more than 2 years now, and this has worsened since the start of 2016 obviously. No. 2 point was China slowdown and China has obviously been a major source of pain for global markets in general, recently.

Many other points from my analysis have also continued to hold true for the sector– like impairments, debt issues, capital raising issues (affected ARI and AGO badly), big miners continuing to flood the world with iron, financial instos negative predictions, iron reaching 30’s, multiple legs of falls, prolonged bear market and importance of cash (MGX IMO fared reasonably well mainly due to good cash), severely worsening broader commodity bust in general....all of which has cumulatively contributed to the biggies getting hammered and the juniors getting decimated.

Few days back (Thursday), I warned ARI investors on the first day of the huge fall that “I can understand that some long term investors might be tempted to buy back to average their cost, but please consider all pros and cons before doing so.” I wasn’t really surprised to see another 42% fall the next day on Friday. I had similarly warned AGO investors in the initial days when it fell to around 3.3 cents for the first time.

Around that time, around a year back, I noted from my then analysis that many of the iron miners that MGX, BCI, AGO, ARI, etc were facing many similar problems. So, I’m just linking my iron macro analysis above if anyone wants to have a read, as many of those factors are still present in the iron ore sector and of course some juniors have been hit even much harder since then.

Based on what I remember, MGX had a good cash balance even then and IMO, that is the one thing that has helped MGX to be one of the better performers as compared to other iron juniors. I mentioned in my FMG conclusion that managing costs, cash and debt IMO should be the top priorities of all iron stocks. I see from a recent article on MGX that MGX has actually increased its cash balance which is now 345 million as compared to market cap of just around 200 million. So obviously that is a huge positive compared to other juniors
http://www.fool.com.au/2016/02/17/iron-ore-price-slams-mount-gibson-iron-limited-results/
https://au.news.yahoo.com/thewest/wa/a/30845603/mt-gibson-trims-first-half-loss/

However like I warned, impairments could be one issue for the miners and I see that MGX’s net loss was due to impairments this time around. Loss was still better at 15.4 million compared to 869 million loss in previous corresponding period.

Obviously, as the Motley fool article shows, port stockpiles in China have been soaring, which might not be good for iron going forward. I’ve also been bearish on the broader macro front since long, and iron and oil are 2 key macro commodities which could typically get hit hard with a global slowdown.

The key positive for MGX is obviously its cash balance. I can’t remember if MGX had any debt, but obviously if it did, then the net balance would be more important. Otherwise, a market cap of much less than cash balance is obviously a strong point, but also a reflection of the fear in the sector.

I mentioned in my macro analysis that if the bear market persists for a couple of years, then cash burn could be a key issue going forward. This has clearly affected ARI and AGO the most so far and MGX has done well because of its cash. It is hence imperative IMO that MGX goes out of its way to cut costs and be very careful in its usage of cash, its major strong point right now. The problem here is that the article mentions that Mount Gibson has forecast annual sales of between 4.5 and 5 million tonnes of iron ore, at an average all in cash cost of $50-$54 per wet metric tonne (wmt) – equivalent to US$35-US$38/wmt at around current exchange rates. And it also mentions that Mount Gibson received an average price of US$37 a tonne. So clearly, things are squeezed for MGX and MGX needs to be careful of not actually eroding its cash balance while moving along, as it would then lose its main strong point.

Good luck with whatever decisions you guys take and all the best. Hope things work out for you guys.

Cheers

Expand

Well done on the explanation.....in terms of "fool's" analysis they will always be late to the party......MGX would have to be 40 cents before they ever put a buy recommendation on it
I prefer to look at technicals and MGX is bottoming to me with a very envious b/sheet

No.	Vol.	Price($)
2	101000	31.0¢

No.

Vol.

Price($)

101000

31.0¢

Price($)	Vol.	No.
31.5¢	242807	6

Price($)

Vol.

No.

31.5¢

242807

No.	Vol.	Price($)
1	37120	0.920
3	45770	0.915
3	31253	0.910
3	68342	0.905
2	44392	0.900

No.

Vol.

Price($)

37120

0.920

45770

0.915

31253

0.910

68342

0.905

44392

0.900

Price($)	Vol.	No.
0.925	15328	2
0.930	89494	6
0.935	70442	3
0.940	72592	7
0.945	128342	5

Price($)

Vol.

No.

0.925

15328

0.930

89494

0.935

70442

0.940

72592

0.945

128342

(20min delay)
Last 31.5¢		Change 0.010(3.28%)		Mkt cap ! $365.5M

Open	High	Low	Value	Volume
30.5¢	31.5¢	30.0¢	$296.8K	964.6K

Iron ore macro analysis, page-2

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