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My first stock analysis (ASX:MGX)

Discussion in 'Beginner's Lounge' started by jdenhaan, Nov 13, 2013.

  1. jdenhaan

    jdenhaan

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    Hi all!

    Just want to run this one past you. I've been studying stock valuation and analysis vigorously for about a week or two and have started to apply some of the things I've learned to come up with my first stock analysis.

    I've picked the company Mount Gibson Iron Ltd. (MGX), because they were highlighted as a potentially interesting buy in an article I read online. I just wanted to see whether my own analysis would correspond with this assessment or whether I would swing the other way. I would love your honest opinion on this!

    Company situation

    Mount Gibson is an iron ore miner that has existed since 1996 and went public in 2002. Obviously iron ore is a sector with its up and downs, depending largely on overseas (mainly Chinese) demand and demand driven by the construction sector. With the Chinese economy in a bit of a slowdown and the mining boom past its (first) peak, trading conditions for MGX have not been easy; year on year profits are a bit down. Having said that, iron ore productions was up significantly last quarter, so things are looking up. In the long term, I expect the Chinese economy to pick up pace at some time and it's only a matter of time before iron ore demands surge again.

    On top of all this, Mount Gibson is sitting on an absolute motherload of cash (420 million) and has nearly completely paid off its debt. The obvious question is what to do with this cash. Dividends have been fairly conservative (~3.7% given today's share price), so I expect there's some big plans in the pipeline with the company hoarding its cash.

    Fundamentals based on FY2013 report

    Total assets: $1555m
    Total liabilities: $373m
    Outstanding shares: 1090m

    If you do some simple math you can easily derive from these numbers that the company currently trades at a share price below its book value of $1.08 per share.

    Total debt: $19m
    Debt to current assets: 0.03
    Cash reserves: $420m

    Debt is negligible and easily covered off by cash reserves.

    Net profit: 157m

    EPS = 0.14

    P/E ratio at current price ($1.01): 7

    A P/E ratio of 7 is very low and given the healthy balance of this company, almost a bargain in my opinion.

    My conclusion: buy and hold for the long term.

    Untitled.jpg

    Technically it looks like the stock has bottomed out. The EMAs are all pointing up up up.

    There's no reason why this stock can't at least double in value over time and move back to its 2011 high of over $2. Obviously, a lot will depend on how the Asian economy develops, as well as how management spends it cash reserves. But it seems like a fairly safe investment, given that the company trades below its book value.

    Opinions?
     
  2. robusta

    robusta

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    The numbers probably look good. The only trouble I have with a single resource business like MGX is I can't work out the price they will receive for their commodity in the future. Asia may grow slowly, quickly or not at all, production is increasing internationally so I have no idea where the supply demand equation will settle. There are some good looking balance sheets in gold, uranium, rare earths, iron ore... But for me I'm not smart enough to predict the future profits.
     
  3. tech/a

    tech/a No Ordinary Duck

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    Like it technically
    Hold it currently.
     
  4. Ves

    Ves Beyond Good and Evil

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    I won't comment on any of your qualitative analysis because I don't follow the company and don't have any intention of looking deeply into a mining company.

    However I would suggest that P/E ratios are irrelevant for mining companies.

    Price / Earnings in its most basic sense says if I pay this price per share, what return per annum would I receive if the company can pay me out all of its current earnings forever. In that sense it is quite a rigid metric, in that it does not consider what happens if the company retains earnings (amongst a myriad of other factors you need to consider to arrive at a valuation).

    Mining companies have assets with finite lives (ie. the raw commodities they extract from their mine will eventually run out) so you cannot use a perpetuity calcuation (such as a P/E ratio) when valuing the asset.

    To value this company you would need to figure out how much of what they are mining they can get out of the ground (gross quantity), how much it will cost to do it, and how long it will take to do it. You would need to find a way of converting any future cash flows / out flows into a figure in today's dollars.
     
  5. ROE

    ROE

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    I dont have these either but I read a fair bit so I have an idea around iron ore and various resource stock
    with junior Iron Ore, Rail access is a real issue, you got to look who allow them to access rail infrastructure and how much they going to charge them for it ... are they cost effective?

    I know a while back FMG fight hard to keep people off their rail infrastructure...

    Currently Rail Infrastructure are control by BHP/RIO and FMG

    you can say they have a competitive advantages against all other miners as this is their infrastructure and they have the first call to use it and bring their product to market, everyone else wait in line or has to go to court to get access and even then they have to pay a price for the access.
     
  6. jdenhaan

    jdenhaan

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    Looks like I may have been to quick around the bend when it comes to P/E values. I'll read into it a bit more!

    Interesting point on the rail access: looks like BHP, RIO and FMG have a 'competitive moat' there.
     
  7. So_Cynical

    So_Cynical The Contrarian Averager

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    MGX is a high cost producer so for the company to make big money IO has to trade significantly higher than it has been recently, so in a nut shell your Punting on the IO price going up significantly and thus the China Boom kicking again.

    If IO falls significantly and stays there, MGX would/could be producing at close to break even or operating at a loss...this fact is, has and will continue to be reflected in the SP.
     
  8. burglar

    burglar

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    First they (FMG) advertised for Locomotive Enginemen.
    Then they bought some Locomotives.
    Over an 18 month period they built the track.

    And all of a sudden they had their first shipment of Iron Ore to China.
    I had to laugh, because I thought they had no wagons !! :p:


    BHP and RIO had a 'competitive moat'.

    FMG just went out and bought a railway.

    So on the point of rail access ...
    if no-one allows you access, you can build your own!

    Good ole wiki:
    http://en.wikipedia.org/wiki/Fortescue_railway
     
  9. jdenhaan

    jdenhaan

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    Interesting! I wonder what's stopping MGX from using that mountain of cash of theirs for a similar project. Maybe their current developments don't yet warrant a separate infrastructure...

    It's interesting by the way how everyone is talking about China 'slowing down'. They are still growing 7% year on year, enough to double the economy in a decade.
     
  10. jdenhaan

    jdenhaan

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    Once again, an interesting point (I'm learning so much here!). I've heard there is the possibility of an oversupply in the not-too long term with Brazil and India opening up their reserves.

    On your note that MGX is a 'high cost producer' I started digging in the 2013 annual report and found that over an 853 mil revenue, the operating cost is 698 mil, or a profit margin of ~18%. Roughly speaking, this means an 18% decrease in the iron ore price would vaporise profit. Given that iron ore is currently at ~132 USD, we'd need to drop down to USD 108. The last time we saw that price was during the crash in 2012. Is a crash like that coming again? A correction maybe, but a crash?
     
  11. burglar

    burglar

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    Andrew "Twiggy" Forrest was in negotiations with BHP & RIO
    He was lobbying State & Federal politicians.
    He left no stone unturned.

    He didn't do it lightly.


    Atlas (AGO) has an agreement with FMG.
    Others will get access to existing rail and port facilities.
     
  12. McLovin

    McLovin

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    If you hang around here long enough you'll see that the investors rarely touch mining stocks, and there's a reason for that. They really are more for the TA crowd. Although you posted a chart too, so maybe you can trade MGX.

    The thing to remember with miners is you need to understand their production costs. They're price takers, which immediately puts me off. And also understand that a high cost producer will be more levered to price changes than a lower cost producer. When prices are rising this can give the appearance of it being a superior business, but when the tide turns they can end up with an uneconomic mine. Think about, for example, the change in profit for two producers one producing at $20/tonne and the other at $100/tonne if the iron ore price moves from $110 to $120. The higher cost producer will have doubled their profit, while the lower cost producer will only have increased their profit by 11%.
     
  13. jdenhaan

    jdenhaan

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    I'm not sure if 'posting a chart' qualifies me as a TA :p I was just trying to build the case for a 'buy' with some technical signals, but I guess I was oversimplifying things a bit in regards to the price of the underlying commodity (iron ore) :)
     
  14. burglar

    burglar

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    Everyone needs to be pigeon-holed. TA, FA, whatever.
    How can you deal with someone who has a foot in each camp.
    Or someone who skips through the minefields.

    I just had to say that, ... and I don't even know why!?

    When FMS rail reached Port Hedland on the wrong side of the port, BHP refused to co-operate.
    This forced FMS to build a huge infrastructure to get rail over the top of BHP territory.

    This photo may or may not be that structure, ... but you get the drift.

    ph.jpg
     
  15. burglar

    burglar

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    I don't know what that has to do with your chosen company MGX.

    What I would say is MGX is operating in a complex environment.
    They will require co-operation from their neighbours in regard to rail facilities and port facilities.
     
  16. jdenhaan

    jdenhaan

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    Not much directly, but it's an interesting insight into the workings of the market MGX is in ;) As usual, I oversimplified things a bit.
     
  17. burglar

    burglar

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    Oversimplifying is only bad when the trade is going against you!
     
  18. jdenhaan

    jdenhaan

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    Well I made a dangerous assumption regarding the value of this company, which fluctuates wildly with the price of iron ore. It might be priced under or close to book value now, but the book value of mining companies is rather unstable and unpredictable, since it depends on the price of the iron ore they have in the ground by the time it gets exhumed.
     
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