Grange Resources Limited (GRR) is an Australia-based company that owns and operates an iron ore mining and pellet production business headquartered in Tasmania. In addition, GRR is the majority owner (70%) in a magnetite development project at Southdown, near Albany in Western Australia.
We are more interested in the mining operation in Tasmania at savage river.
The savage river magnetite iron ore mine is an open-pit mine located northwest Tasmania. Mined ore is then transported to the company’s pellet production facility at port Latta for processing and export. The pellet production facility produces 2.5 million tonnes of iron ore pellets annually. Current open-pit mining operations are set to continue to 2035 (a long-life asset). A Prefeasibility study released in late 2021 has shown underground mining potential at savage river can produce an additional 6 million tonnes per annum with a mine life of more than ten years. The capital investment to expand to underground mining of only A$160 Million.
Now there are two types of iron ore, one being Haematite ore whilst the other Magnetite ore. Haematite fines and lump ore are produced in Western Australia by the likes of BHP Group and Rio Tinto. GRR produces Magnetite pellets which command a value premium. The premium is derived on two fronts: Haematite’s additional iron content and a quality premium.
The financials look excellent for this company
- Unit C1 operating cost of A$99.73 for FY21
- FY21 average product prices are $276.17 per tonne (2020 $196.78 per tonne (FOB Latta)
- FY21 Revenue of $781.7 Million
- Profit after tax $321.6 Million
- Positive operating cash flow of $498.16 Million
- Cash and cash equivalents of $443.9 Million
- Basic and Diluted Earnings Per share of $0.278
- Dividend Yield of 9.3% (Dividend in FY21 was on the high side because of a 10c special dividend)
Looking at these numbers, the company trades with a forward PE of 4.6 times earnings. Market capitalisation is $1.46B, and they have $443.9 Million in cash, more than enough to fund the plans for underground mining at savage river. The cash balance will also go a long way toward financing the company’s 70% share of the development project at Southdown if this project is given the green light.
What are the risk?
China is attempting to achieve what no other country has successfully brought about zero covid through lockdowns. But, as we have seen in Australia, lockdowns lead to lower economic growth, which has a flow-on effect of lower steel demand and to make steel, you need iron ore and coal.
Increasing cost to run the pellet production facility, the company uses gas, and rising gas prices are likely to increase production costs.
Also, price is always a risk for commodity companies as they are price takers, not price setters.
Whilst taking these risks into consideration, it’s important to highlight that even if the price falls back to the average realised price in 2020 of $196.77, the company will still be highly profitable.
Lastly, the financials for this company look outstanding, and we are happy to take a small position.
TRADE ACTION
Number of shares: 3,000
Buy up to: $1.35
Stop loss: $0.85
Profit Target: No profit target to start with we will add profit target as the trend plays out over time