Grange Resources operates as Australia's most experienced magnetite producer with over 55 years of mining history, producing premium quality iron ore pellets from its integrated Savage River operations in Tasmania. The company has experienced significant financial headwinds in FY2024, with profit declining 61% to $58.5 million despite maintaining strong operational cash flow of $239.9 million. This performance deterioration stems from margin compression as iron ore prices fell 14% while operating costs rose 7%, reducing the production-price spread by 51.7% to just $36.80 per tonne.

The investment case centers on the transformative $890 million North Pit Underground Project, scheduled for execution between 2026-2030, which promises to fundamentally reshape the company's cost structure and competitive position. Management projects this transition will deliver a 30% reduction in operating costs, extend mine life to 2040, and reduce carbon emissions by 80%. The company has successfully diversified its geographic revenue base, reducing Chinese exposure from 42.5% to 27.2% while increasing South Korean contribution to 50.8%, providing greater market stability and reduced concentration risk.

Grange Resources Limited (ASX: GRR) is Australia's most experienced magnetite producer, operating the integrated Savage River iron ore mining and pellet production business in northwestern Tasmania. The company's operations consist of magnetite mining at Savage River with a projected mine life extending to 2040, and downstream pellet production at Port Latta producing over two million tonnes of premium quality iron ore pellets annually. These pellets are characterized by low impurity levels, supporting reduced environmental impacts for end users and commanding quality premiums in the market.

The company's business model generates revenue through mining magnetite iron ore, processing it into high-quality pellets, and selling to customers throughout the Asia Pacific region. In 2024, Grange recorded revenue of $520.8 million from these operations through a combination of long-term off-take agreements and spot sales arrangements. The company's key customer relationship is with Jiangsu Shagang International Trade Co. Ltd, representing 27.9% of revenue, whose parent company also holds 47.93% of Grange's issued shares, providing strategic alignment and revenue stability through long-term contracts extending to 2032.

Beyond its Tasmanian operations, Grange owns 100% of the Southdown magnetite development project near Albany in Western Australia, representing significant future optionality with 1.2 billion tonnes of resources. The company is led by CEO Weidong Wang and Chairperson Dr. Michelle Li, with a board combining independent directors and representatives from major shareholder interests, reflecting the significant Chinese ownership stake and strategic partnerships that support the company's market access and operational stability.

Grange Resources experienced significant margin compression in FY2024, with net profit declining 61% to $58.5 million despite a more modest 15.3% decrease in revenue to $520.8 million. This disproportionate profit deterioration was primarily driven by lower realized iron ore pellet prices, which dropped 14% to A$182.94 per tonne, coupled with a 7% increase in C1 unit operating costs to $146.14 per tonne. The production-price spread consequently narrowed by 51.7% to $36.80 per tonne, severely impacting profitability despite achieving a 5.5% increase in pellet production to 2.47 million tonnes.

Geographic revenue diversification showed mixed results, with South Korea emerging as the largest market at 50.8% of revenue (up from 42.0%) while China's contribution declined significantly to 27.2% (from 42.5%). This strategic pivot helped mitigate some exposure to Chinese economic volatility, though it couldn't offset the broader iron ore price pressures affecting all markets. The company maintained strong operational cash flow of $239.9 million despite challenging conditions, demonstrating operational resilience and the quality of its cash generation capabilities.

Balance sheet strength remained a key positive, with cash and liquid investments growing 5.5% to $298 million, providing substantial financial flexibility for upcoming capital investments. The company demonstrated confidence in its long-term outlook by increasing dividends to 2.5 cents per share despite lower profits, resulting in a higher payout ratio of 49.4%. Capital expenditure decreased 22.6% to $199.8 million, reflecting focused investment in the North Pit Underground Development Project preparation, positioning the company for its transformative mining transition scheduled to begin in 2026.

Our financial forecasts anticipate continued near-term pressure with gradual improvement as the North Pit Underground Project progresses toward implementation. Revenue growth is projected to accelerate from 1.5% initially to 5.5% by FY2029 as underground mining begins delivering ore and iron ore prices stabilize. Gross margins are forecast to expand progressively from the current compressed 13.5% to 20.0% by 2H2029, with EBITDA margins improving from 24.4% to 30.0% over the same period, driven by operational efficiencies and the structural cost advantages of underground mining.

Capital expenditures will dominate the cash flow profile, rising from approximately $200 million annually to peak at $310 million in FY2027-28 before moderating as the underground project approaches completion. This investment pattern creates persistent negative free cash flow throughout the explicit forecast period, with FCF reaching its most negative point of -$176.5 million in FY2028 before beginning to recover. The substantial capital deployment reflects the $890 million total commitment for underground development, with the majority invested between 2026-2030.

Return metrics temporarily deteriorate with ROIC declining from current levels to a low of 2.8% during peak investment phase before recovering to 3.6% by 2H2029, with further improvement expected beyond our explicit forecast period. Working capital efficiency is expected to improve gradually, with inventory levels optimizing from current elevated 183 days to 160 days as operational transitions stabilize. These operational improvements combine to produce sustainable growth rates increasing from 2.7% to 3.8% by the forecast period end, positioning the company for stronger long-term performance once the underground transition is complete.

Our comprehensive valuation analysis reveals significant potential upside for Grange Resources across multiple methodologies. The DCF approach yields the highest valuations, with our base case of 63.0 cents representing 186% upside to the current share price of 22.0 cents. This substantial premium reflects the long-term value creation potential of the underground mining transition that may not be fully captured in current market multiples. The considerable gap between market price and intrinsic value indicates investor skepticism regarding execution capabilities and near-term margin pressures.

Multiple-based valuations provide a more conservative perspective, with EV/EBITDA (43.2 cents) and P/E (40.5 cents) approaches suggesting approximately 84-96% upside from current levels. These methodologies inherently emphasize near-term financial performance, which is temporarily suppressed due to margin compression and imminent capital investment requirements. The precedent transactions methodology (58.0 cents) aligns more closely with our DCF base case, reflecting the strategic premium typically associated with acquiring established iron ore assets with long-term development potential.

Our scenario analysis reveals significant valuation sensitivity to key operational and market variables. The bull case (81.0 cents) assumes more robust iron ore price recovery, superior cost reduction execution, and successful Southdown project development. The bear case (49.0 cents) contemplates continued price weakness and disappointing cost savings, yet still represents 123% upside, highlighting the extreme discount at which the stock currently trades. We assign greatest weight to the DCF methodology (60%) due to its ability to capture long-term structural improvements, producing our implied valuation range of 40.0-65.0 cents representing 82-195% upside potential.

The primary risk exposure stems from commodity price volatility, as evidenced by the severe margin compression experienced in FY2024. Without hedging protection, Grange remains vulnerable to continued iron ore price weakness, though the company's quality premium positioning provides some buffer. The underground mining transition represents both the greatest opportunity and most significant execution risk, with the potential for delays, cost overruns, or technical challenges that could erode projected benefits. Management has implemented prudent risk mitigation through progressive development and parallel Centre Pit extension planning, though the complexity of the transition cannot be understated.