Mount Gibson Iron (ASX: MGX) might have one of the most obscure value propositions out there – the company carries almost as much cash as its entire market cap.
Mount Gibson is a producer of high grade (65% Fe) iron ore products with assets in the Kimberley and mid-west regions of WA. The company also holds 60 million shares in Fenix Resources (ASX: FEX) and additional options.
So what's the catch?
A Short Mine Life
It comes down to two key issues: Corporate governance and mine life.
Mount Gibson's flagship Koolan Island operation, which is the company's only producing asset, has a remaining mine life of approximately three years.
Once this mine is depleted, the company will effectively revert back to explorer status.
From a corporate governance perspective, Mount Gibson has had a few hiccups over the years, including:
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A 2014 wall collapse caused a four-year outage at Koolan
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A $950 million write down in 2015 amid low iron ore prices and challenges at Koolan
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Major Chinese shareholders in the register including Shougang Fushan Resources (~12.6% stake) and APAC Resources or formerly Shanghai Merchants Holdings (~37% stake)
Cash trove
Mount Gibson's June quarter report presented mixed results this week. While the company maintained strong cash flow and a robust cash position, its production and costs fell short of analyst expectations.
The good: Cash and investment reserves of $436 million as of 30 June 2024. This figure excludes the company's share and option holdings in Fenix Resources, which amount to approximately $20 million at financial year end. The company said its total cash and investment reserves equate to approximately 37 cents per share (the stock is currently trading at 38.5 cents).
The bad: Macquarie said the company's June quarter shipments were 11% weaker-than-expected at 872,000 tonnes and cash costs were 38% higher at A$97 a tonne. The company's FY25 guidance of 2.7-3.0 million wet metric tonnes was also 35% weaker due to the "depletion of high-grade stockpiles and reconfiguration of the primary haul ramp."
Mount Gibson's shares plummeted 10.5% on Wednesday, July 17, the day of the quarterly report release, hitting a one-year low.
Mount Gibson five-year price chart (Source: Market Index)
Despite this setback, Macquarie analysts maintained their Outperform rating on the stock. However, they adjusted their outlook in response to the production guidance:
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FY24 EPS forecast: reduced by 20%
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FY25-26 forecasts: cut by 18-48%
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Target price: lowered by 4% to 48 cents
Macquarie expects Mount Gibson to continue producing some solid numbers over the next two years, including:
| | FY24e | FY25e | FY26e |
| Net profit ($m) | 155 | 97 | 86 |
| Free cash flow ($m) | 274 | 106 | 141 |
| Dividend (cps and % yield) | 0 | 2 cps (5.1%) | 1 cps (2.6%) |
| Cash ($m) | 436 | 542 | 647 |
Source: Macquarie (July 2024)
Where to from here?
Mount Gibson has a massive cash backing that's currently close to its market cap (or a little bit over if you include the Fenix shares and options).
"The start of FY25 is likely to be softer while the company works on repositioning the haul ramp and conducting remediation ground support activities. Updates on the use of the $436 million in cash remains a catalyst," Macquarie analysts said in a note on Wednesday.
Mount Gibson's Noose Mining Investor Conference Presentation (18 July 2024) noted two forward looking plans:
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Targeting resources investment opportunities, with holdings (excluding Fenix) totalling $19 million in junior operating and development companies
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Regional exploration activity continuing, focusing on areas prospective for base metals in Western Australia
It will be interesting to see what they do with such an outsized cash position. Could it be a special dividend? Or maybe a pivot into future facing commodities like copper?