Mount Gibson Iron (MGX) is Western Australia’s fifth-largest iron ore miner based on export volume. The company was one of the first new iron ore producers in the mid-west region of Western Australia and it took advantage of that position.
MGX experienced a considerable boost in 2006, when it acquired Aztec Resources and its Koolan Island project. However, the group’s FY12 result showed contraction in profit in over five years.
MGX’s FY12 performance was a real change from its previous years of growth.
Tonnes of ore sold for FY12 was 5.21 million, which down a 0.5% on FY11. Whilst this may not look like that bad of a result, it came on the back of a 29% increase in production, which is an indication of a lower grade of ore.
Sales revenue over the 12 months decreased 3.5% to 648.5 million, with the company blaming a lower price for its ore. Net profit was down a massive 28%, to 172.5 million.
The group did have $292.7 million of cash on hand, but this was down from $387 million a year earlier. Operating cash flow fell 75.6% to $56.2 million over the financial year, and if we see a repeat decline in FY13, MGX’s cash balance is likely to experience another steep drop.
Iron ore prices had a dramatic fall since the end of the financial year, dropping from a little under $135 a ton to a low of around $86 a ton early September. This represented a massive 36.3% decline.
Since then the iron ore price has risen over 32% on the back of an increase demand by China. China, which accounts for over the 60% of global demand for the ore, saw its exports grow at the fastest rate in over three months in September.
Exports grew by 9.9% compared to a year earlier, which was well above the 5.5% forecasted by economists. What we think is alarming for MGX is that over the period of this increased demand MGX’s share price has been more or less flat.
This compares to other pure-play iron produces like Fortescue Metals and Atlas Iron which have seen their share price increase by over of 30%.
MGX’s FY12 results were disappointing to say the least, and unless there is a material pick up in iron ore prices we don’t see a return to growth in the near term. Whilst the iron ore price has recovered 32% since its September low it is still down over 15% since the end of FY12.
What is worrying is that despite the recent rise in the ore price, MGX’s share price was not able to hold on to any of its gains like its peers did. This indicates that the selling pressure relates to deteriorating company fundamentals such as the lower grades it mined in FY12.
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