- DJ Carmichael initiates coverage with Buy on Gindalbie - Karara project expansion should grow earnings - Value on offer despite a likely equity raising

By Chris Shaw

Gindalbie Metals ((GBG)) is an emerging iron ore producer, owning the Karara project in Western Australia with joint venture partner AnSteel. Karara began shipping hematite lump and fines ore last month and is expected to reach 10Mtpa in shipments by the end of this year. The eventual target is production of 16Mtpa.

As production increases at Karara, DJ Carmichael expects Gindalbie will see significant growth in profits. Strong cash flows are also expected, which should open up additional growth options in the future.

AnSteel is viewed as a good joint venture partner by DJ Carmichael, while the fact Gindalbie is already in production and is further advanced than many emerging iron ore peers with respect to funding and cost challenges is regarded another positive.

Perth-headquartered DJ Carmichael has initiated coverage on Gindalbie with a Buy rating. Others agree, as the FNArena database shows Gindalbie is rated as a Buy by all five brokers covering the company.

While DJ Carmichael has not set a price target, the database shows a consensus price target for Gindalbie of $1.46. The target is based on consensus earnings per share (EPS) forecasts of minus 0.3c in FY11 and a positive 4.1c in FY12, while DJ Carmichael is forecasting EPS of minus 1.1c and 20.6c respectively.

The major issue for Gindalbie is the likelihood of an equity capital raising in coming months. This is to cover an increase in capex costs associated with expanding production at Karara. As RBS Australia pointed out last month, capital costs at Karara may now hit $2.7 billion, up from a previous estimate of around $2.0 billion.

At the time the capex blowout was announced Citi noted Gindalbie had around $100 million in available cash, which means an equity raising is all but inevitable. This implies some uncertainty for investors as the extent of any capital raising remains uncertain, a situation unlikely to become significantly clearer before a cost review is announced, likely around the middle of the year.

As with DJ Carmichael, the brokers in the FNArena database covering Gindabie see value even allowing for an equity raising. Citi's point is the expansion potential at Karara is enough to offset the fact shareholders will be diluted by any equity issue. What will also help is expansion will see Gindalbie ship magnetite ore two years earlier than would have otherwise been the case.

Over the past year Gindalbie shares have traded in a range of $0.86 to $1.485 and the current share price implies upside of 26.2% relative to the consensus price target according to the FNArena database. Investors should note this is prior to what appears an unavoidable capital raising.

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