ANALYSIS: Atlas Iron has emerged a leaner, better-financed company just a year after its near-death experience.
ANALYSIS: Atlas Iron has emerged a leaner, better-financed company just a year after its near-death experience.
Few investors are likely to think of Atlas Iron as one of the top 30 companies based in Western Australia, considering it was teetering on the edge of collapse just 12 months ago.
The company’s share price at the time of writing (4.7 cents) appears to confirm Atlas’s status as a member of a group unkindly dubbed ‘penny dreadfuls’ because of their price under 10 cents.
But that negative view misses multiple factors that signal the return of Atlas from its near-death dive, when it was trading as high as $4.26, to 0.9 cents as recently as October last year – a fall of 99.8 per cent.
While very few companies have survived such a devastating collapse, Atlas has. And although its revival has further to go before it can claim to be fully restored, the seeds have been sown for full-scale renewal.
The return of Atlas is best traced in a list of WA’s top 100 ASX-listed companies compiled by accounting firm Deloitte.
Last September, after a major financial reconstruction, Atlas was ranked 80th on the Deloitte 100. In October it rose to 61st, while at last week’s market value of $430 million it was 26th.
Atlas’s move up the corporate pecking order has little to do with the lowly share price and a lot to do with a massive 9.1 billion issued shares which, when multiplied by 4.7 cents, means it has a higher stock market value than many other local companies, including Mt Gibson Iron ($418 million) and Perseus Mining ($371 million).
Long-term shareholders in Atlas, while welcoming the revival, will undoubtedly be thinking about the time when their company was trading at more than $4 a share and their business was valued at $4 billion. In those days, Atlas was also a member of WA’s top five companies, a rank unlikely to be achieved again soon, though nothing should be ruled out given what has happened in the past three months.
What went wrong at Atlas is a classic case of small company biting off more than it could chew. It also fell victim to the popular theory of a decade ago that commodity markets had changed, with conventional cycles replaced by a super-cycle.
More later on the lesson to be learned in the near-collapse of Atlas, but first a look at what’s being going right during the past few months, with five factors behind the return of Atlas to the ranks of leading WA companies.
• A rescue package launched in 2015 and finalised in May last year, under which creditors agreed to a financial restructure that included a $US132 million ‘haircut’ on what they were owed in exchange for shares.
• Creditors, including US investment funds, yellow goods manufacturer Caterpillar, and commodities trader Glencore emerging with 70 per cent of Atlas’s issued shares and options.
• Major savings, including widespread redundancies, which have cut costs by a third, with Atlas’s December cash cost per tonne (the C1 cost) of ore mined falling to $US25.50/t – about $US10/t higher than the bigger iron ore miners.
• An unexpected but welcome rise in the price of iron ore to more than $US80/t, less than half its 2011 peak of $US191/t, but double the 2015 low of $US40/t.
• Strong profits at the current iron ore price from the company’s annual output of around 15 million tonnes.
Just how well the company is performing financially can be seen in two events early last month. The first was a decision to repay $54 million of the company’s debt, followed by a lift in the company’s credit rating from a lowly CCC to a more favorable B-.
As well as repaying debt earlier than expected thanks to the combination of lower costs and a higher iron ore price, Atlas has moved to a position where it expects to be in a net cash position by mid-2017 – a point when cash on hand is greater than debts.
A closer look at the Atlas position will come in the next few weeks with the release of the company’s half-year statement, follow a few weeks latest with confirmation that Atlas will develop a new iron ore mine called Corunna Downs.
With an annual production target of 4mt of ore over an initial five to six years, Corunna will replace the ageing Wodgina project, which is due to run out of ore sometime this year.
Good news as it is for Atlas that it has replacement projects in hand to supersede old mines, there is a whiff of the underlying cause of the company’s crisis in the Corunna project – it is small, about 250 kilometres from Port Hedland, and will rely on road transport to get it ore to port.
The estimated capital cost of between $47 million and $53 million is not high and the estimated break-even iron ore price of $US50/t of ore is attractive at a time when the iron ore price is above $US80/t.
But as Atlas gets closer to committing to the development of Corunna, all of those issues of capital cost, operating cost and the likely trend in the iron ore price will weigh on Atlas management, and shareholders, the majority of which are one-time creditors.
What the creditor/shareholders will be asking management is whether Atlas would be better run as a cash cow to service its remaining debts before switching to a growth focus, which means investing in new mines, even if it is to maintain production.
Those questions go to the heart of the strength (and weakness) of Atlas when it started operations with the tiny Pardoo project near the coast north of Karatha, and to then fan out across the Pilbara with a series of small, high-grade, projects that did not fit the model of the major miners and their preference for much bigger mines connected to railway systems.
Atlas was a star for a few good years, especially when iron ore was soaring to its peak of $US190/t. Its production, profits and future development plans justified its $4 billion stock market value.
However, when the iron ore boom ended, as all booms do, the weakness of the Atlas business model was exposed, especially the commitment to expensive truck haulage across the Pilbara.
Grand plans, which the company’s founding chief executive, David Flanagan, talked about as a ‘three horizons’ strategy, were crippled by the iron ore price collapse, high levels of debt and high operating costs relative to other WA iron ore producers.
‘Horizon one’, according to a 2011 presentation by Mr Flanagan, was to be achieved by 2015 with a targeted output of 15m/t. ‘Horizon two’ (to be achieved by 2017), was for 46m/t, followed by an unspecified tonnage in ‘horizon three’.
The game stopped in 2015 at horizon one, and even with the new Corunna mine seems likely to stay there for some time.
As a business case, Atlas can be seen as a victim of the iron ore price collapse or a victim of a belief in the commodities market continuing to enjoy boom conditions for an extended period of time, which they didn’t.
Now comes the revival; and while it’s easy for a critic to look back at what went wrong, it’s also fair to say that Atlas was not alone in being caught out by the abrupt end of the boom.
The new plan, contained in the company’s guidance for 2017, is for production of between 14mt and 15m/t of ore (horizon one from 2011), at an all-in cash cost of between $48/t and $52/t – roughly half the Australian iron ore price ($A106/t) at the current exchange rate of US75 cents.
In some ways, Atlas can be seen as a company that has been to financial hell and is now on its way back, though this time it is burdened by a massively expanded capital base, a share register dominated by creditors, and doubts about the sustainability of the current iron ore price.
The next few months will decide the fate of Atlas. Either it will be worked to satisfy creditor/shareholders or it will pick up where Mr Flanagan left off and continue to develop its long list of small iron ore pods, happy to grind out 15m/t a year while keeping costs low and aspirations lower.
