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Is this iron ore miner ridiculously cheap?

iron ore mining truck
Credit: iStock

Mount Gibson Iron Limited (ASX: MGX) has returned to profit in the 2016 financial year (FY16), producing an underlying $19.4 million gross profit from revenues of $240 million.

Excluding one-off items, including an insurance payment of $86 million following the collapse of the Koolan Island seawall, Mount Gibson reported a statutory profit of $80.3 million, compared to a monster $889.5 million loss last financial year.

Koolan Island operations

Koolan Island operations showing Main Pit underwater. Source: Company presentation

Are Mount Gibson’s shares cheap?

For a company with a market cap of $321 million – that equates to a P/E ratio of just 4x – cheap in anyone’s language.

At the current share price of 29.5 cents, shares are also trading well below net tangibles assets per share of 35.9 cents. The company is also trading below its cash balance of $400 million at the end of June 2016.

Operations

During FY16, Mount Gibson produced 5 million tonnes of iron ore, at an all-in cash cost of $46 per wet metric tonne (wmt). That’s well down on the $62/wmt in FY2015. It’s also nowhere near the likes of iron ore majors Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), but should still be enough to produce a decent profit at current iron ore prices.

The weighted average price received for Mount Gibson’s ore during FY16 was US$48/wmt Free On Board (FOB), compared to US$56/wmt in FY2015.

Operating cash flow came in at $5.7 million – an improvement on the negative $91 million recorded last financial year.

The iron ore miner currently has two mines in operation, Extension Hill and Koolan Island, but is targeting to begin mining the Iron Hill deposit in early 2017.

Outlook

A massive reduction in all-in operating costs, a substantial and growing cash balance, the potential to restart operations at Koolan Island and a pending insurance claim for business interruption are all positives for Mount Gibson.

A stabilising iron ore price will also help, although the miner is forecasting much lower sales of iron ore in FY2017 of between 2.8 and 3.1 million tonnes at an all-in cash cost of $48/wmt.

It’s not my cup of tea, but those willing to take on a highly speculative offering might want to take a closer look at Mount Gibson.

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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

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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