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Mount Gibson Iron Limited reports full-year results: Is it time to buy?

What: With a vastly improved cash position and strong prospects for expansion, Mount Gibson Iron Limited (ASX: MGX) looks well placed to deliver shareholder value despite lower annual sales predicted for FY2015.

Highlights of its results:

  • Record revenue of $898m (up from $852.9m)
  • Record iron ore sales of 9.7 million wet metric tonnes (wmt) (up from 8.8 million wmt previously)
  • Underlying NPAT up 27% to $117.7m
  • Statutory NPAT $96.4m (down from $157.3m) after Mineral Resources Rent Tax adjustment
  • Cash and term deposits increased $143.8m to $519.8m total
  • Total Cost of Goods Sold including royalties of $74.64/wmt (down from $79.61/wmt)
  • Average realised price (all products, high and low grade) $93/wmt
  • FY2015 sales guidance of 6.6m to 7.0m wmt

So What?

The three most important points to take away from this report are Mount Gibson’s excellent cash position, total costs of goods sold, and FY2015 sales guidance.

A strong cash position (and low debt) allows Mount Gibson to fund its numerous expansions including the very low-cost Koolan Island and the Shine Project.

Management also announced its intentions to watch for useful acquisitions, which can be funded through this cash balance or from other lines of equity accessible to the company.

With regards to the company’s main operations – mining – the total cost of goods sold is the most important figure, particularly for future reporting periods as current iron ore prices are much lower than were achieved in FY2014.

The ‘average realised price’ figure stated above is somewhat misleading since it includes a large shipment of low-grade ore at US$55/tonne; for its other products Mount Gibson achieved figures of US$95/tonne or more.

Future cost reductions are key as they will be what underpins Mount Gibson’s competitiveness in what I expect to be an even tighter iron ore market going forward.

Finally, FY2015 sales guidance (some 28% lower than FY2014) is worth noting since it reflects the fact that earnings for 2015 are likely to be substantially lower than the current year, which could present investors with a more attractive opportunity to purchase it in the future.

Now What?

Australia’s junior iron miners are starting to look more appealing at their current prices – most have great prospects, are well run, and are still profitable at the current iron ore price.

However I expect that iron ore will decline further in price as more capacity comes online globally over the next couple of years.

For now I would watch and wait before making a decision on buying iron ore companies.

The same statement thankfully does not hold true for other resource producers, with some great bargains available elsewhere on the ASX.

Several speculative resource companies can be found in my earlier article here, or interested investors can read The Motley Fool’s free report on three of the best high-risk resource companies for your portfolio.

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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