What investors need to know about the future of Mount Gibson Iron Limited

An interesting article on The Australian’s website a month ago saw the chief executive of Mount Gibson Iron Limited (ASX: MGX), Mr Jim Beyer, state his belief that iron ore prices had neared their bottom and were likely to rebound soon.

With the price up 6.7% in the past few days, Mr Beyer could be right and today’s release of the September quarterly activities report provides the perfect opportunity to revisit the company.

Here are the highlights:

  • Total ore sales of 1.863 million wet metric tonnes (mwmt)
  • On track for yearly production of 6.6-7.0 mwmt
  • Average realised price of $65 US$/dry metric tonne, down from $83, $95, $103, $102 over the previous four quarters
  • Cash of $465 million ($0.43/ share)
  • Further capital expenditure at Koolan Island of $60m over two years ($23m already spent)
  • Shine Hematite Project put on hold

Mount Gibson, along with virtually every other iron miner in Australia is desperately working to cut costs in the face of shrinking realised prices.

While the low value of the AUD to the USD will help, Mount Gibson’s immediate future is focussed on boosting production and reducing costs at Koolan Island while continuing to explore its prospective tenements at the Field’s Find and the west side of Koolan Island.

It’s a difficult situation, because on one hand the company has significant cash at bank and comparatively high iron ore grades to other junior miners (62%Fe vs 58%Fe); yet the company is faced with dwindling reserves and shrinking iron ore prices.

The scenario that concerns me most is one where Mount Gibson has trouble maintaining and growing its reserves, which will deplete more rapidly as production increases to reduce overall costs.

China’s growth in iron ore demand cannot continue at its current rate forever; sheer logistics and the law of compounding defy it.

Logically if it can’t continue, it must slow or come to an end.

Hugely increased production and cost cutting from the world’s major miners are making it harder for smaller competitors to compete, while shrinking realised prices push junior miners closer to their break-even points.

$465 million in cash provides a lot of insulation but I think investors could be delivered a string of diminishing returns from junior miners over coming years as global production continues to increase.

For the record I believe that – assuming prudent decisions from management – Mount Gibson Iron has what it takes to survive the downturn. Analyst Morningstar has a $0.60 ‘fair value’ target on the stock which seems in the right ballpark.

But investing is not about surviving, it’s about prospering, and I doubt if Australia’s junior iron miners will be delivering much of that to investors over the next few years.

A much better bet is The Motley Fool’s Top Stock pick for 2015, an interesting household name without the faintest scrap of exposure to the iron ore market, or resources full stop for that matter.

Our top analyst has released an in-depth report into the company, which you can access, completely free, by clicking on the link below and entering your email address.

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

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