Junior iron ore miner Mount Gibson Iron Limited (ASX: MGX) reported a huge loss for the 12 months ended 30 June 2015 as a result of the plummeting iron ore price and massive impairment charges.
So What: A quick glance at Mount Gibson’s 12-month share price chart reflects that all is not well in the iron ore sector. The stock has plunged 76% in that time to trade at just 18.2 cents with the iron ore price coming under enormous pressure as a result of waning global demand, combined with a tidal wave of fresh supplies from the world’s biggest producers.
While this trend has impacted the entire industry, including the majors BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), it has been the junior and high-cost miners which have suffered the most.
For the full-year, Mount Gibson Iron reported an agonising $911.4 million loss, compared to a $96.4 million profit in the 2014 financial year (FY14). The group’s underlying loss for the period was $13.9 million (compared to a $173 million gross profit in FY14) but was impacted by non-cash impairment charges totalling $945.2 million.
The vast majority of these impairment charges related to mine properties ($712.9 million) as well as property, plant and equipment ($203.2 million). They were also mostly recognised during the first half of the year following the damage endured by the seawall of its Koolan Island mine which severely restricted the group’s ability to mine iron ore. Indeed, it produced just 5.8 million wet metric tonnes compared to 9.7 million tonnes in FY14.
Meanwhile, the miner’s full-year revenue declined 64% to just $325 million and it ended the period with $334 million in cash and term deposits, down from $520 million a year earlier.
Now What: During the reporting period, the iron ore price fell from roughly US$93 per dry metric tonne (dmt) to just US$59.50 per dmt, according to the company’s report.
As a result, Mount Gibson, and all others in the sector have been furiously cutting costs in order to stay afloat. Mount Gibson will certainly need to with Goldman Sachs forecasting a fall below the US$40 a tonne mark for iron ore in the next 18 months.
Considering the headwinds facing the sector, investors would be wise to remain well clear and seek better alternatives elsewhere.
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