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Company: Gindalbie Metals

Stock code: GBG

Share Price: $0.555 (as at close Friday 7th October 2011)

P/E Ratio:  29.95 (Sector P/E 12.38)

Market Cap: $630,000,000

Broker Calls

Credit Suisse – BUY, Price Target $1.60 (increased from 95 cents)

Morningstar – BUY, Fair Value $1.00

Austock – BUY, Price Target $1.12

UBS – BUY, Price Target $1.20

Merrill Lynch – BUY, Price Target $1.00

RBS – BUY, Price Target $0.99

RBC – Sector Perform, Price Target $0.80

Citi – BUY, Price Target $1.50

Bell Potter – BUY, Price Target $1.40

JP Morgan – OVERWEIGHT, Price Target $0.99

 

Chart: Share price over the year versus ASX200 (XJO)

Stock code: GBG

Charts: Gindalbie Metals Limited

More news: Gindalbie Limited

Gindalbie Metals (GBG) is an Australian iron ore exploration company that is developing projects in Western Australia. As one of the 10 most shorted stocks on the ASX earlier this year it has seen a lot of selling pressure; its shares have tumbled by more than 50% over the past six months and -33% in the last three months. Today GBG has fallen to the 59th spot in the top shorted stocks. 

This year has been a shocker for the iron ore explorer. On the back of capex blowouts, the future of the company was put under a cloud when its major foundation customer – China’s Sinosteel – closed its mid-west iron-ore project due to delays in the $4 billion Oakajee port and rail development. Because of the delays, Sinosteel shut down its $2 billion Weld Range iron ore project near Cue in WA, laying off 43 staff. ‘We are certainly not closing the door on Weld Range, however we must make the right business decisions in order to protect our assets and ensure a realistic future for our organisation,’ Sinosteel Midwest Corporation chief operating officer Julian Mizera said in a statement. Sinosteel, one of China’s largest iron ore traders, said the mine would remain closed until uncertainty around the Oakajee development was resolved.

Oakajee was originally due for completion by 2012 but that stretched out to 2015, costing the company $100 million a year, Mr Mizera said. ‘Unfortunately we have now had to draw a line in the sand.’

As a foundation customer lined up for Oakajee, Gindalbie Metals said the project was fundamental to its plans to develop its flagship Karara iron ore project. ‘For production beyond 16mtpa, Karara requires the development of Oakajee Port and has signed an MOU (memorandum of understanding) as a foundation customer of the project…we continue to support the development of Oakajee and continue to be engaged in constructive negotiations with all parties involved,’ it said in a statement.

Description

According to Gindalbie, it is developing the Mid-West’s biggest and most advanced iron ore project – it’s flagship project ‘Karara’. However GBG isn’t alone in this project; Karara is being developed via a 50/50 Joint Venture with China’s no.2 steel producer AnSteel.

The aim at Karara is to produce both high grade magnetite concentrate on site as well as pellets in north-eastern China. GBG claims that Karara ‘is a world-class orebody in terms of its scale, quality, consistency and extremely low waste to ore stripping ratio, which will result in relatively low mining costs.’

The numbers sound impressive, with the known resources at Karara sufficient to support production of +30Mtpa for more than 30 years:

– magnetite JORC resource – 2,409Mt @ 36%Fe (Inclusive of 977.5Mt @ 36.4%Fe JORC Reserve)
– Estimated contained magnetite concentrate 1,027Mt @ 68.2%
– 8Mtpa initial production of high grade magnetite concentrate , and 2Mtpa hematite product

At the recent Diggers and Dealers conference GBG management outlined the scope of Karara, where much of the on-site and associated infrastructure is being designed and built to accommodate production levels well in excess of 8Mtpa. GBG said that the scope of the project includes a conventional 20Mtpa open pit mining operation, production of 8Mtpa of magnetite concentrate on site at Karara, transportation of magnetite concentrate to the Port of Geraldton using rail as the preferred product transport mode, and off-take for magnetite concentrate and pellets at Ansteel’s new 6.5Mtpa Bayuquan steel mill in China. If GBG’s growth projections pan out, the company has a rosy future.

Source: GBG presentation, Diggers and Dealers Conference August 2011

Production of hematite ore started in March 2011 and magnetite concentrate production is expected in early 2012, with a ramp up to 8Mtpa by the end of 2012. Growth to 16Mtpa is planned, but from that point it needs the Oakajee port – which has been plagued by delays – for future growth. It also has a sales agreement for 480,000t of DSO over eight months and it is expected that there will be a ramp up to 2Mtpa by the end of next year.

Although a mere minnow next to its Karara project, GBG also has a JV with Royal Resources – a 40% interest in  Warriedar, which is made up of a number of tenements next to Karara.

Financials

 

2009A 2010A 2011A

 Sales Revenue ($m)

 3.8 1.2 9.1

 EBITDA ($m)

-8.75 -8.21 8.92

 EBIT ($m)

-9.33 -9.14 7.05

 Reported NPAT ($m)

 26.2 -2.5 13.9

 Price/Earnings

 0.0 0.0 29.95

 Dividend Yield (%)

 0.0 0.0 0.0

 Net Profit Margin (%)

 -86.5 -206.5 153.5

 ROE (%)

 -1.9 -0.5 2.5

 Net Debt/Equity (%)

 -72.9 -47.5 22.6

Link to company Earnings Report: Full Year Earnings Report – to June 30th, 2011

Iron Ore

Iron ore prices have been relatively stable in Australian dollar terms compared to other commodities despite the surging Australian dollar.

#FOTO:1317:600#

Source: IMF

Nevertheless, iron ore miners have been hard hit over the past year with only takeover target Sundance, BC Iron and market darling Atlas Iron making gains for shareholders. The table below shows that Gindalbie was in fact the third worst performing iron ore producer over the last 12 months (-50%), behind only Brockman Resources (-52%) and the hapless Murchison Metals (-85%). The capital expenditure blowout announced to the market in March and problems with Oakajee sent the share price into a tailspin, although the market pullback and commodities price plunge has encouraged further selling.

#FOTO:1316:600#

Analysts’ views

Despite poor market sentiment, Austock securities analyst Andrew Shearer is one of a long list of brokers who has a buy on GBG, with a 12-month price target of $1.12 – double the current price of 55.5 cents.

Shearer says that one positive is that ‘the final capital estimate at $2.57 billion has come in under consensus of $2.7 billion and also includes allocations for upgrades to infrastructure in preparation for Stage 2 expansion to 16Mtpa.’

On the flipside, operational costs have increased to $65-$68/t where previous guidance was $42/t. ‘A large portion of the cost increase is attributable to revised rail and port charges, including a capital charge for the rail upgrades,’ says Shearer. He is quick to point out that the charge is fixed, so this means that any increases in production will reduce the per tonne cost.

It is the increase in costs and the pushing out of the production schedule that has been weighing down on the GBG share price, with a longer time frame to commence production. ‘Commissioning of the magnetite concentrator is now scheduled to commence from January 2012, with ramp up to commence from June 2012 and nameplate capacity to be reached late 2012.’

Shearer believes that delays in commissioning present a risk to the operation, however he thinks that that the 6-month ramp up period forecast is a realistic estimate. ‘GBG is well advanced to becoming a producer of high grade magnetite concentrate from the mid-west region of Western Australia,’ says Shearer. ‘Our modelling has assumed production ramping up to 16Mtpa to be shipped through Geraldton. Whilst the development of Oakajee is remote at present, we are optimistic that a solution will be found to allow production to grow to +30Mtpa.’

Shearer also points out that beyond the Karara JV, the upside to GBG could come from exploration success and a potential pellet plant.

Meanwhile on the back of the announced capital raising, Merrill Lynch has listed GBG as a high risk buy, with a price target of $1.00 – down from its previous price target $1.10. It says that there is still some risk in the stock, but that the company has completed a major milestone on the completion of civil works at its Karara iron ore project. 

Richard Batt of Shadforth Financial Group is also bullish on GBG and likes the fact that Karara has the potential to produce 30 million tonnes of iron ore a year for more than 35 years. Earlier this year the company announced that its maiden iron ore shipment would proceed within the next two months – ahead of schedule. Batt says this was positive and followed the signing of a hematite ore sales agreement with Sinosteel Midwest Corporation. “Signing this agreement is a significant event, as it enables the Karara project to generate initial cash flow, taking advantage of high iron ore prices and strong demand for quality product,” Batt says.

Conclusion

With commodities prices under pressure and investors reducing their exposure to risky plays, the risk of investing in mining shares is not to be underestimated. But GBG has additional risks including an unexpected increase in capex, high operating costs and large debt burden. On a more positive note, GBG is not a pre-production company, nor a junior explorer. In fact, iron ore production will begin next year.

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