Junior iron ore miner Mount Gibson Iron Limited (ASX: MGX) has a market capitalisation of around $235 million, but today announced a whopping loss of $870 million.
One-off impairment charges were the culprit, with the company forced to write down the value of its Koolang Island mine, iron ore inventories, property, plant and equipment, and other minor items by $946.3 million.
Those charges reflect the huge fall in iron ore prices and damage to the seawall at the company's main Koolan Island mine. As a result, the Mount Gibson only mined 3.1 million tonnes of ore in the six months to December 2014, compared to 5.1 million the previous year.
Adding in a fall in the average realised price from A$100 per tonne to $61 per tonne during the half also saw revenues decline from $509.5 million to just $188.9 million. Mount Gibson receives a discounted price on its ore due to quality, hence the reason it received an average price of $61 per tonne, rather than the average benchmark Platts price of US$82 per tonne.
With the current price around US$63 per tonne, it's unlikely that Mount Gibson is making a profit. Add in the issue with the seawall at Koolan Island – which the company is not certain will be repaired – Mount Gibson is now totally reliant on the Extension Hill mining operation. Luckily, it appears to have fairly low production costs, which may mean the miner can survive.
Cost cutting continues with around 200 site-based roles at Koolan Island being made redundant and another 20 in the Perth corporate office.
With around $354 million in cash and term deposits, Mount Gibson is trading at less than the value of its cash, but given the company chewed through $165 million in the six months to December, there's no certainty that the company will still have all that cash at the end of this financial year.
Like other juniors Arrium Limited (ASX: ARI), BC Iron Limited (ASX: BCI) and Atlas Iron Limited (ASX: AGO), Mount Gibson really needs to see a higher iron ore price, or a much lower Australian dollar to be viable. Foolish investors may want to steer clear and watch this play out from the sidelines.
