Title:| Mount Gibson Doubles Down on High-Cost Iron Ore With Koolan Island Restart | FundName:| Mount Gibson Iron Limited | ProductType:| STOCK | AnnPublishedDate:| 29/04/2017 | AnnouncementType:| Analyst Note | MarketIdentifier:| MGX | AnnouncementAction:| Review | Applies to eQR:| Yes | Analyst Note:| We lower our fair value estimate for Mount Gibson Iron to AUD 0.37 from AUD 0.42 per share after factoring in the likely restart of the relatively high cost Koolan Island mine. The company says it will cost approximately AUD 100 million of capital expenditure to restart the mine, with more than half of that directed toward rebuilding the seawall. Mount Gibson estimates the project has a net present value of AUD 106 million or AUD 0.10 per share, however, this assumes an iron ore price of USD 55 per tonne versus our midcycle forecast of USD 35 per tonne. Our lower iron ore price forecast is the key driver of our expectation for Koolan Island to be value destructive. The company intends to ship 12.8 million tonnes of iron ore over four years, starting early 2019, following an approximate two-year construction period. The major drawback of the project, in our opinion, is the front-end-loaded cash outflows, both for the initial capital expenditure and elevated initial waste mining movements which are above the life of mine average until 2021. The mine should generate free cash flow from 2021 as waste mining requirements rapidly drop off, but the downside is back-end-loaded cash flows and the increased likelihood of softer iron ore prices. We think management has been diligent and thorough in its approach to the redevelopment, but our quibble is with the price required for Koolan Island to generate value. Mount Gibson estimates the mine to be cash flow break even at an iron ore price of USD 46 per tonne. Mount Gibson trades close to our fair value estimate. Net cash stands at approximately AUD 450 million or AUD 0.41 per share, however, our fair value estimate is below this given we expect net cash outflows from Koolan Island’s development. As a relatively high-cost and short life producer, Mount Gibson remains no-moat rated. Very high fair value uncertainty reflects single commodity risk, operating leverage, and the potential for a large acquisition. | Last Close Price:| $0.36 | Morningstar Recommendation:| Hold | Recommendation Change:| Unchanged | [/table]
MGX Price at posting:
36.0¢ Sentiment: Buy Disclosure: Held
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