Australian Bauxite Ltd revises its production outlook: Should you buy?

Overall production costs have risen, but so has the expected profit. Will shareholders in Australian Bauxite Ltd (ASX:ABX) come out ahead, or behind?

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Over the past few months I've written a number of articles on Australian bauxite explorers, beginning with a Top Stock pick back in September, followed soon after by coverage of the potential upside and major risks to owning bauxite companies.

One of my favourites, Australian Bauxite Ltd (ASX: ABX) released initial production costs, tonnage and revenue guidance earlier this month, but those preliminary figures were updated with more concrete numbers today.

Australian Bauxite now expects to receive US$58-61 per tonne of its ore, which leaves US$37-42 profit after freight costs of US$19-21 are accounted for.

This equates to roughly $42.50-$48.28 in Australian dollar terms at an assumed exchange rate of 0.87 AUD-USD.

In further good news the costs of start-up are expected to be significantly lower, costing only $5 million (including contingency funds), down from the $10.4 million expected previously.

However operating cost estimates have increased, with higher mining, admin, and state royalties giving a total overall cost of AU$29-31 per tonne of bauxite delivered.

This gives a total operating margin of around $11 a tonne in the first year, which should see Australian Bauxite earn $4.84 million in profit.

At today's price this puts Australian Bauxite on a modest P/E of 9, although this isn't the whole picture since the price of production should decrease in years two and three, while production will ramp up to 2 million tonnes per annum (Mtpa) during FY17.

It's easy to see then how Australian Bauxite is trading on modest figures given future production forecasts, and this doesn't take into account improving margins and possible increases in the price of bauxite or falls (or rises!) in the value of the Aussie dollar against the US.

Commodity speculation isn't for everyone, but Australian Bauxite is one company that looks to be getting it right.

Australian bauxite miners might be a fantastic opportunity, but there's plenty more where they came from…

Motley Fool contributor Sean O'Neill owns shares in Australian Bauxite Ltd.

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