MGX 0.00% 68.0¢ mount gibson iron limited

Long Term Value of MGX

  1. 846 Posts.
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    I was reading an analyst report and they value MGX as below

    “The fair value estimate is underpinned by cash of AUD 354 million at end 2014, worth AUD 0.32 per share plus plant and equipment, land and buildings worth AUD 220 million combined. There is potential upside from an insurance claim for the Koolan Island flood but a fast resolution is unlikely - we expect the insurers to stall. For example, it took over four years for BHP to receive payment for the Queensland floods.”

    The value of plant and equipment is what I find most useful. It is good to finally have a reasonable number put against the value of mining equipment and ports. It allows one to reasonably estimate value on the basis they don't re-open koolan island.

    If it takes 5 years to get that $0.52 / share out of the company through MGX buying worthwhile assets or liquidating and capital returns then MGX shareholders will get an annualised return of 18.5% or about 7.5% above the index at $0.22/share.

    Of course there is potential to go higher or lower. It is my expectation the return will increase because I have assumed MGX won’t get any insurance money, they won’t get $10million a year in interest on cash in bank and Extension hill will be cash flow neutral (the opposite of their current situation). Management have also indicated they won’t restart Koolan island unless viable to do so. This means they aren’t convinced it is worthwhile to restart and they aren’t taking a typical chinese approach of proceeding at all costs. I believe this is an honest statement of management’s thoughts as their past behaviour is of a similar nature and actions speak louder than words.

    MGX seems like a solid buy given the information available.

    I suspect that the lack of information available is the reason for such a low price. There is limited information on production costs or retail price of Extension hill product. The assumption by many market participants is that MGX is now losing money. This is the opposite of fact given they have 1 x cash flow positive mine and $10mil a year in interest repayments. I suspect it will take 1.5 years for the market to re-evaluate the value of MGX as we will need to wait until next financial year where there is a year of extension hill operating by itself and investors can establish a reasonable estimate of MGX earning power. If the issue of risk associated to value will remain un-abated until after a year of solid results then I think it is reasonable to expect the price of MGX will float very far from reasonable value for at least 6 months. It would not surprise me if we reached $0.15 over the next few months for a short period of time (annualised return of 28% based on value as above).

    Anywho, just sharing my thoughts, love to hear other peoples thoughts on valuating this rather tricky beast, DYOR, don’t trust HC posters as we are notorious for over hyping investments and helping others to lose money
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