Worth Watching IV: Atlas Iron Limited (ASX: AGO)
On April 7, 2015 Atlas Iron requested ASX for a voluntary suspension in the trading of its securities. This was a result of the negative impact on profitability of the declining iron ore price. It had previously suspended all mining operations. The company remains suspended to this day. But three mining operations are back up and running.
The suspension was intended to provide the company with time to review all operations and determine where cost savings and efficiencies could be implemented. In April, most observers considered that Atlas would not survive. However, this looks to have been a premature call.
In a “Roadshow Presentation” released on 29 June 2015, the company showcased the support it has received from its contractors, employees and the Western Australian government. In essence, the company has achieved a reduction in all up costs of USD10/dmt (dry metric tonne), down to USD50/dmt. This is a great achievement, and is due in no small part to the reappointment of founding director, Mr David Flanagan, as Managing Director.
The company last traded at AUD0.12, for a market cap of AUD110 million. At 31 May it had cash of AUD59 million and debt of AUD347 million. It is now seeking to raise up to AUD180 million at AUD0.05 per share (plus a free 1:1 option). If this capital raising is successful, Atlas will have cash of AUD179 million and an effective market cap of AUD226 million.
On May 18 The Sydney Morning Herald reported that Andrew Forrest was going to personally participate in the capital raising. This is a very positive sign and will undoubtedly influence other potential investors.
There are many risks to an investment in Atlas Iron; as outlined on pages 62 to 70 in the June 2015 Prospectus.
As I write, the iron ore price has fallen to USD52.30, leaving an uncomfortably thin cash margin, notwithstanding that the company has forward sold much of its production for the rest of the year. And most commentators are predicting further falls because of weak Chinese demand.
However, against that, we can also expect further falls in the Australian dollar. In fact it has already fallen to AUDUSD 0.7488, down from 0.785 as used by Atlas. Falling energy costs will also benefit the company.
If the capital raising is successful, Atlas would offer a highly leveraged exposure to the iron ore price and to the AUDUSD. Worth watching when it is again listed.
My “Worth Watching” series is a brief review of corporate presentations that appeal to me. They are not based on in-depth research and are in no way a recommendation to buy or sell shares. The reader is advised to do their own research and/or consult with their broker.