Materials, IPO & Equity Analyst

Venkat Ramana Nandyal

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Bottom-Up

Mr Market is pricing <a href="https://www.smartkarma.com/entities/19043" target="_blank" data-smartkarma-citation="entities:19043:1">Mount Gibson Iron Ltd (MGX AU)</a> for less than its net cash and liquid assets on its balance sheet, which implies that an investor would get all the assets plus some cash for free. It sounds like a fabulous deal until one digs in a bit deeper. Investment Thesis<ol class=""><li>MGX has a strong balance sheet with cash and cash equivalents of A$507M at the end of September 2017 quarter with no debt. This cash is more than the company’s current market cap of ~A$430M, implying a negative enterprise value. On the face of it seems that Mr Market has got this one horribly wrong, but if one digs a bit deeper, Mr Market seems to doubt the ability of the company to generate free cash at the current iron ore benchmark prices. </li><li>The company reported all in group cash cost (includes opex, sustaining capex, royalties and corporate costs) of US$46/wmt in Q1/18 and expects the costs to remain in the region of A$47-52/wmt in FY18. This puts the company in the 4th quadrant of the cash cost curve amongst its peers. As the company restarts its Koolan Island operations in early 2019, Global Equity Research (GER) expect the cash costs to increase beyond this range for FY19 until the operations reach a steady state.</li><li>The current benchmark is trading at a range of US$60-70 per tonne. However, the company’s realised prices are at an average discount of 30% to the 62% Fe fines prices (benchmark prices). The company’s EBITDA margins are extremely volatile, and at these iron ore prices or any further drop from the current range, GER expects the company to report an operating loss and quickly burn cash, a scenario that is highly probable according to Mr Market’s current valuation of MGX. </li><li>The major risk to MGX earnings ability is the on schedule ramp-up of low-cost Vale's SD11 mining complex. This low-cost iron ore fines project could disrupt the market and would put pressure on benchmark iron prices to trade below US$60/t.</li></ol>

Mr Market is pricing Mount Gibson Iron Ltd (MGX AU) for less than its net cash and liquid assets on its balance sheet, which implies that an investor would get all the assets plus some cash for free. It sounds like a fabulous deal until one digs in a bit deeper. Investment ThesisMGX has a strong balance sheet with cash and cash equivalents of A$507M at the end of September 2017 quarter with no debt. This cash is more than the company’s current market cap of ~A$430M, implying a negative enterprise value. On the face of it seems that Mr Market has got this one horribly wrong, but if one digs a bit deeper, Mr Market seems to doubt the ability of the company to generate free cash at the current iron ore benchmark prices. The company reported all in group cash cost (includes opex, sustaining capex, royalties and corporate costs) of US$46/wmt in Q1/18 and expects the costs to remain in the region of A$47-52/wmt in FY18. This puts the company in the 4th quadrant of the cash cost curve amongst its peers. As the company restarts its Koolan Island operations in early 2019, Global Equity Research (GER) expect the cash costs to increase beyond this range for FY19 until the operations reach a steady state.The current benchmark is trading at a range of US$60-70 per tonne. However, the company’s realised prices are at an average discount of 30% to the 62% Fe fines prices (benchmark prices). The company’s EBITDA margins are extremely volatile, and at these iron ore prices or any further drop from the current range, GER expects the company to report an operating loss and quickly burn cash, a scenario that is highly probable according to Mr Market’s current valuation of MGX. The major risk to MGX earnings ability is the on schedule ramp-up of low-cost Vale's SD11 mining complex. This low-cost iron ore fines project could disrupt the market and would put pressure on benchmark iron prices to trade below US$60/t.

Mount Gibson Iron

MGX: "Cash Is King" – Not Always