Iron ore price slams Mount Gibson Iron Limited results

Mount Gibson Iron Limited (ASX: MGX) could see its share price take a tumble today after the low iron ore price wrecked the company’s half year to December 2015.

Making matters worse is the fact Mount Gibson receives a discounted iron ore price due to lower-than benchmark grade ores.

As a result, the iron ore miner has reported a $15.4 million loss after tax for the first half of the 2016 financial year (FY16), thanks to impairments of $23.6 million. Revenues fell 31% to $128.6 million, from 2.6 million tonnes of ore sold. Mount Gibson received an average price of US$37 a tonne, compared to the average benckmark price of US$51 a tonne.

Still, Mount Gibson managed to increase its cash and term deposit balances by $11.5 million to $345.5 million. (The company’s market cap is around $191 million).

What next for Mount Gibson?

The miner has forecast annual sales of between 4.5 and 5 million tonnes of iron ore, at an average all in cash cost of $50-$54 per wet metric tonne (wmt) – equivalent to US$35-US$38/wmt at around current exchange rates.

However, investors should note that the benchmark price is in dry metric tonnes (dmt) and miners receive a penalty for moisture content.

That suggests that Mount Gibson will be struggling to breakeven at current iron ore prices of around US$46.78 a tonne. (In the three months to December 2015, the average benchmark price was US$47 a tonne and Mount Gibson received US$35/dmt).

The recent run up in iron ore prices isn’t expected to last long either, as supply continues to pour into an already oversupplied market, and stockpiles at ports in China soar – as the following chart shows.

iron ore stockpiles chart

Credit: Bloomberg

Foolish takeaway

When a company’s share price is trading below the amount of cash on its balance sheet – like Mount Gibson’s is, the market is suggesting that Mount Gibson will struggle to survive.

In this case, the market could be right.

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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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