I was looking at Grange Resources Limited (ASX: GRR) late last week. This is an interesting company that could prove the genesis of an idea for readers – I won't be taking it any further myself.
Grange Resources is a profitable iron ore miner and miller whose primary product is iron ore pellets. It has cash costs (which exclude shipping and corporate overheads) of A$79 per a tonne and received an average realised price of A$98 per tonne last year, on production of 2.7 million tonnes.
What's really interesting however, is that the company had $170 million in cash and low or no debt as of 31 March 2017. The company has a market capitalisation of just $133 million at today's share price which means that it has more cash in the bank than the total value of the company – you're getting the business itself for free. It pays something like an 8% dividend although that may be disrupted in the short term due to the recent mine accident affecting production.
Of course, there's no such thing as a free lunch and Grange comes with a couple of issues:
- A Chinese steel company is the primary holder with a 47% stake in Grange
- Management have virtually no shares in Grange
- There's no sign they will use the cash for anything productive or to pay out dividends
- It appears that capital expenditure has been cut to the bone and the mill will be up for expensive refurbishments soon
- I wonder if safety costs have also been cut to the bone, given that management repeatedly touts its safety record and focus on safety, yet there was a fatal accident at its mine a few months ago
- Obvious dependence on the iron ore price
So there are a few thorny and potentially expensive issues there that could mean the cash pile is a bit of a mirage. More importantly, the question for investors should be 'how will I make money in this company?' Given my views on the iron ore price and Chinese governance I couldn't see a scenario beyond 'if I'm lucky the share price will rise until it is worth more than the net cash' which implies a 20% or 30% gain.
In my mind that's not really enough of a reward, given the risks of the cash being eaten up by refurbishments and such. However, I only spent an hour or so on the business and readers willing to do more due diligence may come to a different conclusion (looking at end-user demand for iron ore pellets may prove illuminating). Certainly having more than 100% net cash is something that should get the value investors salivating.
