Grange Resources Limited flags job cuts as iron ore crashes

Tasmania-based iron ore pellet producer Grange Resources Limited (ASX: GRR) this morning announced record pellet production in 2015, although that has been unable to help a share price on skid row throughout 2015 to close the year at just 9 cents per share.

The junior miner’s big problem is the plunging iron ore price as far bigger players like Rio Tinto Limited (ASX: RIO) continue to flood the market with supply, despite slowing demand growth from Chinese buyers.

Grange is a specialist producer of high-quality iron ore pellets and has resorted to slashing costs in an attempt to remain cash flow positive. This response is in part due to its relatively high operating costs compared to its competitors.

This morning the business conceded that pellet demand remained “subdued” and as a result redundancies may be made in an admission that the business is under pressure due to the continued weakness of the iron ore price.

However, Grange remains an interesting opportunity for any investors who feel that iron ore has found a bottom and is likely to enjoy a sustainable price rebound.

The business turned an underlying profit of $33.3 million for the most recent half year, yet the market only values the whole business at around $105 million on current valuations.

The business also looks cheap on other conventional metrics such as dividend yield, which currently sits above 10% given that the company managed to dish out 1 cent per share last year. However, investors need to carefully consider whether all, or part of this dividend is sustainable before buying the stock.

Depending on your view of the future direction of iron ore prices, Grange will either appear a cheap opportunity, or a stock to avoid given its relatively high operating costs and the potential for iron ore prices to trend lower from here.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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