Atlas Iron (AGO)

[greengiraffe]

Many thanks Boon.

Always appreciate your hard work.

Speculatively Vested
GG

My preliminary take on Atlas Iron (AGO):

1) Shares price = AUD 0.375
2) Shares outstanding = 919.48 million
3) Cash = AUD 264 million (30-June-2014)
4) Debt drawn = AUD 302 million (30-June-2014)
5) Dividend = AUD 0.02 per share.
6) Development expenditure decreasing from AUD 372M in FY14 to AUD 125M for FY15 (Management projection)
7) NAV = AUD 1.67
8) AGO is trading at steepest discount to NAV compare to its major competitors : BHP, Rio, Vale & Fortescue (FMG).
Price to Book :
Rio = 1.88
BHP = 1.97
Vale = 1.31
Fortescue (FMG) =1.22
Atlas (AGO) = 0.22
9) However, AGO does not have cost advantage over its competitors.
Break even cost : USD/tonne
Rio = 45
BHP = 49
Vale = 60
Fortescue = 73
Atlas = 82
10) AGO trucks its ore to Port Hedland – has no assess to rail network, with existing train lines dominated by larger players – probably explains cost disadvantage
11) If AGO could find a rail solution to replace its trucking model - costs could be reduced substantially.
12) Demand risk: fundamentals are still very strong in the industry - Industrialization/urbanization across SEA, Middle East, South-America will underpin demand for iron ore as growth cools in Chinese economy.
13) Supply risks - massive expansions by low-cost miners, BHP, Rio and Vale would create a supply surplus and drive prices down even further – there is high possibilities that these low cost producers may pursue this “supply strategy” to capture market shares..
14) Costs are mainly in AUD and incomes are mainly in USD - a weakening AUD would help.
15) Main risk is still iron ore price movement in the future.
16) If margin could be maintained -iron ore price stays above its breakeven cost – fine.
17) If iron ore price stays below its break-even cost – can it weather the falls until other high-cost players leave the market.
18) My take is for volume of 12 Mtpa, for every USD 10 / ton of market price below its breakeven cost – AGO would lose USD120 million per year.
19) It has cash to sustain short term loses and paying off interest on borrowing - beyond which it would have to sell its assets or shut down.
20) Depressed share price could make it a potential takeover target.

(not vested – on watch list)