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Broker Buy - Gindalbie Metals

Broker Buy - Gindalbie Metals

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.

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By Staff Journalist 05.07.2011

BUY RECOMMENDATION

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 

Chart: Share price over the year to 04/07/2011 versus ASX200 (XJO)

Stock code: GBG

Charts: Gindalbie Metals Limited

More news: Gindalbie Limited

 

 

These recommendations first appeared in Austock Securities weekly newsletter on 04/07/2011, visit www.austock.com.au to subscribe.  Please note that TheBull.com.au simply includes broker recommendations on this page. The inclusion of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

Austock Disclaimer
Disclosure of Economic Interests
The views expressed in this research report accurately reflect the personal views of Austock Research analysts about the subject issuer and its securities. No part of the analyst’s compensation was, is or will be directly or indirectly related to any recommendation or view expressed in this report.
Disclaimer/Disclosure
This publication has been prepared solely for the information of the particular person to whom it was supplied by Austock Securities Limited (“Austock”) AFSL 244410.  This publication contains general securities advice.  In preparing the advice, Austock has not taken into account the investment objectives, financial situation and particular needs of any particular person.  Before making an investment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. Austock and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication.  Austock believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by Austock or any of its directors, employees or agents. 
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