Broker: Austock Securities
Analyst: Craig Stranger
Company: Gindalbie Metals Ltd
Stock code: GBG
| Closing price|| $0.815|
| Target Price|| $1.12|
| % difference|| +41.1%|
Gindalbie, an Australian iron ore exploration company that is developing projects in Western Australia, has been in the news for all the wrong reasons over the past few months. As the one of the 10 most shorted stock on the ASX according to last week's data, GBG's share price has been hammered this year - falling 40% over the past six months alone.
The future of the company has been put under a cloud since WA's $4 billion Oakajee port and rail development was dealt a further blow, after a major foundation customer closed its mid-west iron-ore project. Sinosteel shut down its $2 billion Weld Range iron ore project near Cue in WA, laying off 43 staff, due to ongoing delays in the development of the Oakajee deepwater port and rail lines. "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 had stretched out until 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 the 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."
However despite the bad news, Austock securities analyst Andrew Shearer currently has a buy on GBG, with a 12-month price target of $1.12 - a 40% premium to the current price of 81.5 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," notes 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," notes 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.
Based on Thomson Reuters data, 80% of analysts have a buy on GBG with a total of ten analysts covering the stock, 20% have a hold. This is compared to 90% with buys three months ago, 10% with holds.
Chart: Share price over the year to 04/07/2011 versus ASX200 (XJO)
Stock code: GBG
Charts: Gindalbie Metals Limited
More news: Gindalbie Limited
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