Mount Gibson Limited (ASX: MGX) CEO Jim Beyer has told investors the company could consider closing its last remaining operating mine, Extension Hill if iron ore prices persist at current low levels.
Speaking on an investor call on Wednesday, Mr Beyer said that Extension Hill was cashflow positive during the June quarter, with all-in site cash costs, including royalties and capital expenditure at $44 a wet metric tonne. At that price, Mount Gibson is earning around $24 a tonne with the spot iron ore price at US$50.66 per tonne and the Australian dollar exchange rate at 74.14 US cents. (Which makes me wonder why the company would consider closing its main producing mine if current prices persist). The company does note that that the site cash cost is before corporate cost allocations.
Mount Gibson's Koolan Island mine is potentially closed forever after the seawall collapsed and flooded the pit. The company is looking at ways of possibly reopening the mine, but repairing and restoring the seawall could be an impossible task. Mining of the Acacia East satellite pit continues but likely not for much longer. The miner has flagged plans to place Koolan on care and maintenance while it investigates the possibility of reopening the main pit.
The good news for shareholders is that Mount Gibson is still sitting on $334 million in cash and term deposits and virtually no debt at the end of June 2015. That's a $10 million increase since the end of March, but well below the $520 million at the end of June 2014. At today's price of 21 cents, Mount Gibson sports a market cap of $223 million, well below its cash backing.
Mount Gibson sold 5.8 million tonnes of ore in 2015 at an average price of US$ 54 per dry metric tonne and received $325 million in revenues. Because of the company's lower quality grades and impurities, Mount Gibson receives a discounted price below the Average 62% Fe (iron ore) price of US$72 per tonne.
Looking to the year ahead, the miner is forecasting an increase in production at Extension Hill to between 3.5 and 4.0 million tonnes in the 2016 financial year. Total ore sales should be slightly higher at between 4.0 and 4.5 million tonnes, but the target production price is $50-54 per tonne including all operating, capital, royalties, closure and head office costs.
Foolish takeaway
The problem the company faces is the discounted price of US$38 per tonne, or around A$51 per tonne it receives for its standard Extension Hill ore. That's roughly in line with target production price, meaning Mount Gibson could easily swing to a loss this financial year – and that's as long as the spot iron ore price doesn't fall any further. Despite the cash backing, this is more value trap than value.
Buyer beware.
