Mount Gibson Iron Ltd

Another small- to mid-cap Australian resources firm, Mount Gibson Iron Ltd (MGX) owns and operates two iron ore mines, Tallering Peak and Koolan Island, in Western Australia. As well, construction is underway for a third deposit at Extension Hill, and further exploration continues at all three sites.

Mount Gibson mines iron ore as hematite, with over 50% Fe in its composition. The ore from Koolan Island is particularly fine in grade, with over 60% Fe and a low level of impurities. All of Mount Gibson’s ore is exported, currently to China.

The company has completed its takeover of Aztec Resources Ltd. In 2009, Mount Gibson maintained revenues at 2008 levels, but a rising cost of goods sold ratio lead to a 62% decrease in net income and a negative semi-annual earnings surprise for investors in August 2009, with a decrease in earnings of 84% from August 2008 levels. The full year’s earnings, however, remained sound, with little debt and a strong cash flow position.

Mount Gibson has a price to earnings ratio of 25.66, and earnings per share of 0.06. Over the past five years, its stock has consistently outperformed the overall ASX.

In March 2008 the stock MGX peaked at 3.78 while forming a lopsided head and shoulders formation. The downside was provided by the global financial crisis, and the stock went into almost vertical freefall in October, finally bottoming out at 0.19 in November.

Since that time MGX’s gains have been impressive, establishing a strong uptrend line which has recently peaked with a 52-week high at 2.09 on 12 April. The price action broke briefly beneath the bullish trendline, but the false break was not confirmed by volume and the price recovered, as shown on the analysed chart, below:

Like many other Australian mining stocks, this chart appears to be sketching a head and shoulders formation. The neckline or measured move is support at roughly 1.30, established by the false break beneath the trendline and confirmed by the dive between the head and right shoulder, although suffering its own false break in the process.

Note that the true break of the bullish trendline was confirmed by volume, which also confirmed the move higher from the support line, as the price action rises to form the right shoulder. Also note the two gaps remaining to be filled, between:
•    1.88 and 1.825; and
•    1.42 and 1.455.

As the right shoulder forms, it should fill in the upper gap. If the chart pattern develops, that will be followed by a move back to the neckline at 1.30.

technical analysis by Craig Liles