Should You Buy Mount Gibson Iron Limited at this Share Price?

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What Happened to the MGX Share Price?

Mount Gibson Iron Limited [ASX:MGX] was up by 2.38% in early afternoon trading today. The stock was trading at a price of $0.215 a share at around 2pm. The entire Aussie market was lifted to above the 6,000 mark following big gains in miners. Both oil and iron ore have been going up in price, and naturally, investors are buying back into the depressed commodity sector.

Why Did This Happen to MGX Shares?

It will be overdone.
The iron ore price has rebounded by more than 20% in the last three weeks. Today, Fortescue jumped by more than 7%. Most miners were up on better prices in iron ore and energies. All these have been a reaction to what investors believe to be a bottom in iron ore price.
They might be right. This could be the turning point for iron ore. After all, the oil price has already bottomed and has no doubt added inflationary pressure to iron ore pricing.
That is not all. Although there is more bad news coming out from China, the actual price for iron ore has been climbing. This indicates better demand and definitely chances for lower supply. BHP Billiton expressed that it will halt some expansion plans going forward. This is a major step forward for a reflation of the iron ore price. Other producers will likely follow suit.
More stimulus in China will bring more demand on top of what is already a higher level of demand than last year. Add lower supply to this and we are going to see a higher iron ore price.
Chances are, the commodity has already bottomed.

What Now for MGX?

However, it will be overdone.
It is likely investors will buy more than they should in the commodity sector. The most likely scenario is for iron ore to get to a price around US$65 a tonne by year end. Although that is still a notable increase from the current $57.81 a tonne, it is not a huge V-shaped rebound. If anything, it is going to be a mild recovery.
But it is very possible that stock investors buy more commodities shares than they should. We may see more rallies in commodity stocks going forward. Investors should remain watchful. I believe the buying will be overdone and there will be corrections along the way.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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