ANALYSIS: Recent numbers from iron ore miner Atlas Iron suggest it may be moving from survival mode to revival.
Few investors in Atlas Iron could have expected the one-time leader of Western Australia’s small iron ore producers to lose its mojo so quickly and so dramatically.
Given the tumult surrounding Atlas during the past five to six years, it is reasonable to expect even fewer see prosperity in the future.
But that’s just what might happen.
Like most iron ore miners that lack the economies of scale arising from being big in a bulk commodity business, Atlas found itself severely disadvantaged when the iron ore price crashed three years ago.
The share price of the one-time high flyer, which pioneered the concept of small-scale production in the Pilbara and the use of road haulage rather than rail, collapsed by an eye-watering 99.8 per cent from a high of $4.22 in mid-2011 to 1 cent (and less) last year.
Even today Atlas looks to be a shadow of its former self, with a share price around 2.1 cents reflecting both the collapse and the massive blowout in the number of shares on issue to a staggering 9.26 billion.
Returning from a crisis of the sort that engulfed Atlas, which forced a wholesale management and operational shake-up as creditors took effective control of the business, was always going to be a heavy lift. And while victory cannot yet be declared, there are signs of a better-than-expected recovery.
The miner’s latest profit report told part of the Atlas survival-revival story, an achievement that has as much to do with the good luck of a high iron ore price as good management in driving costs down.
Revenue from the production of a near-steady 14.4 million tonnes of ore in the 12 months to June 30 rose by 11 per cent to $871 million, with cash flow up from $31 million to $154 million.
Even more impressive was the conversion of a loss of $159 million in the 2016 financial year into a profit of $48 million last year, and another big reduction of debt from $182 million to $103 million – a number that represents a 69.5 per cent fall on the $337.8 million of debt early last year.
Perhaps most significant of all was the near-perfect match of that $103 million in long-term debt with Atlas’s cash on hand, which stood at $101 million as at June 30; and while $20 million of the cash was in a reserve account, the high iron ore price since June 30 could mean that Atlas now has more cash than debt.
Interesting as the survival of Atlas has been, a far more interesting question is what comes next, with an early hint of continued recovery coming in the form of a credit-rating upgrade by both Standard & Poor’s and Moody’s.
What the credit agencies like is the rising level of liquidity and impressive profit performance from a business that had not been expected to survive.
The tricky question is whether Atlas has done its best work at its Abydos and Mt Webber mines, or whether it can keep going and shift out of survival mode into growth through the development of new projects such as Corunna Downs and McPhee Creek, which would enable it to maintain production at around current levels while also laying the foundations for future expansion.
A lot depends on the price of iron ore, and that’s when Atlas’s position becomes quite interesting – because very few analysts expected the price to stay around its current $US77 a tonne, or as investment bank Credit Suisse put it last week in a telling comment about tipping a fall in the iron ore price, “we have all been wrong”.
If the banks continue to be wrong and iron ore prices remain higher than previously expected, the outlook for Atlas could be better than expected.
Macquarie Bank, for example, last week made a substantial increase in its iron ore price forecasts for the next two years. The 2018 forecast is up 27 per cent to $US63/t, and 2019 is up 6 per cent to $US51/t. Atlas remains profitable at both forecast prices, assuming the exchange rate remains where it is today.
Investment bank Citi acknowledged the admirable job performed by Atlas so far, but doubts whether Atlas’s free cash flow will be under pressure over the next two years “driven by our bearish iron ore price outlook and Corunna Downs capital expenditure”.
But, and this a very big but, Citi also acknowledges that, if iron ore remains as strong as it is today (remember Credit Suisse’s “we were all wrong” comment), then the outlook for Atlas is improved substantially.
Citi said the upside risk to its forecasts for Atlas was iron ore remaining at its current price, in which case the company’s free cash flow will amount to $103 million in 2018 and $198 million in 2019. These figures are a lot better than the negative cash flow forecasts of $10 million and $34 million in 2018 and 2019 respectively, if iron ore retreats to the low levels forecast by the bank.
For the first time since Atlas plunged there is the prospect of a debt-free company evolving with growth options being seriously considered.