Update: Mount Gibson Iron Earnings

Aug.21.14 | About: Mount Gibson (MTGRF)

Summary

Mount Gibson reports decent earnings thanks to a higher output of lower-grade ore.

There are no surprises in this financial report, but shareholders should prepare for a tougher 2015 if the iron ore price doesn't recover.

The investment thesis remains standing, Mt Gibson is free cash flow positive, pays a 5.37% dividend and its net cash position is worth half of the market cap.

Mount Gibson (OTC:MTGRF) has announced its financial results for the financial year 2014 which, as is quite common for Australian companies, ended in June. The full year revenue was close to A$900M ($830M) which was in line with expectations. The higher production (up 10% compared to last year) helped to compensate the lower revenue per tonne due to the lower iron ore price on the world market in the second half of the financial year. Despite this, the average received FOB price per tonne was $86/wmt which allowed the company to generate a positive cash flow given the fact that the cost per tonne was approximately $70/wmt. This resulted in a net profit of $0.0822 per share.

The production was higher than the previous year, but 2015 will be a much more difficult year for Mount Gibson as the iron ore price doesn't seem to be recovering. However, I do expect the impact on the received FOB price to be relatively minimal, as Mt Gibson sold 1.4Mt of low-grade DSO iron ore at an average grade of 53% Fe. This stuff was sold at a discounted price (approximately half of the benchmark price), so the sale of this very low-grade ore has impacted the average received price. As there will be no more shipments of this ore, the impact on the received FOB price will remain limited, and based on the current benchmark price of $98/t, I'm expecting Mount Gibson to receive $80-81/t FOB for the 6.6-7M tonnes it is expecting to produce this year.

All in all, these numbers are pretty decent as Mount Gibson generated $176M in free cash flow of which $40M will be used to pay a $0.037 dividend. The net cash position (defined as current assets + deferred tax assets - total liabilities) increased to $337M so there's no liquidity risk at all, and Mount Gibson will be able to cherry pick from potential assets being sold by other companies in distress. Even though BC Iron (OTC:BIRNF) has made an offer to acquire all outstanding shares of Iron Ore Holdings (OTC:IRNHF), I wouldn't be surprised to see Mount Gibson making an offer as well as it would an interesting fit to acquire projects in the Pilbara region and the north shore.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.