Is Mount Gibson Limited good value or a value trap?

With a market cap of $223 million and a net cash balance of $334 million, is Mount Gibson Limited (ASX:MGX) a bargain?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mount Gibson Limited (ASX: MGX) CEO Jim Beyer has told investors the company could consider closing its last remaining operating mine, Extension Hill if iron ore prices persist at current low levels.

Speaking on an investor call on Wednesday, Mr Beyer said that Extension Hill was cashflow positive during the June quarter, with all-in site cash costs, including royalties and capital expenditure at $44 a wet metric tonne. At that price, Mount Gibson is earning around $24 a tonne with the spot iron ore price at US$50.66 per tonne and the Australian dollar exchange rate at 74.14 US cents. (Which makes me wonder why the company would consider closing its main producing mine if current prices persist). The company does note that that the site cash cost is before corporate cost allocations.

Mount Gibson's Koolan Island mine is potentially closed forever after the seawall collapsed and flooded the pit. The company is looking at ways of possibly reopening the mine, but repairing and restoring the seawall could be an impossible task. Mining of the Acacia East satellite pit continues but likely not for much longer. The miner has flagged plans to place Koolan on care and maintenance while it investigates the possibility of reopening the main pit.

The good news for shareholders is that Mount Gibson is still sitting on $334 million in cash and term deposits and virtually no debt at the end of June 2015. That's a $10 million increase since the end of March, but well below the $520 million at the end of June 2014. At today's price of 21 cents, Mount Gibson sports a market cap of $223 million, well below its cash backing.

Mount Gibson sold 5.8 million tonnes of ore in 2015 at an average price of US$ 54 per dry metric tonne and received $325 million in revenues. Because of the company's lower quality grades and impurities, Mount Gibson receives a discounted price below the Average 62% Fe (iron ore) price of US$72 per tonne.

Looking to the year ahead, the miner is forecasting an increase in production at Extension Hill to between 3.5 and 4.0 million tonnes in the 2016 financial year. Total ore sales should be slightly higher at between 4.0 and 4.5 million tonnes, but the target production price is $50-54 per tonne including all operating, capital, royalties, closure and head office costs.

Foolish takeaway

The problem the company faces is the discounted price of US$38 per tonne, or around A$51 per tonne it receives for its standard Extension Hill ore. That's roughly in line with target production price, meaning Mount Gibson could easily swing to a loss this financial year – and that's as long as the spot iron ore price doesn't fall any further. Despite the cash backing, this is more value trap than value.

Buyer beware.

Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »