vale wins 90% jump , page-11

March 31, 2010

Atlas Iron Aims To Be Producing 12 Million Tonnes Of Direct Shipping Ore Annually By 2012.

By Our Man in Oz / www.minesite.com

It is unlikely that you will find the word "wonderful" in any corporate reporting manuals, nor in the rules of the Joint Ore Reserves Committee which governs mineral reporting. "Wonderful", however, is the preferred (non-JORC) way of describing this week's 100 per cent rise in the official price of iron ore, at least according to David Flanagan of Atlas Iron. "We're yet to see the detail of how the new pricing system will work", David said when chatting with Minesite's Man in Oz about the recent deal done by BHP Billiton and Vale with Asian steel mills. "But theres no doubt that its going to have a substantial impact on the industry".

The impact on Atlas is already being reflected in the company's share price. Atlas shares have risen by 20 per cent over the past month, and the company reclaimed it's title as a A$1 billion business in early March when it's price ticked over A$2.23. At it's latest price of A$2.45 Atlas shares are close to their highest level since mid-2008, just before the full impact of the global financial crisis hit home. When it did, Atlas crashed to a low of A44 cents as some shareholders rushed for the exit, possibly making one of the biggest mistakes of their investing lives, because Atlas is now well on its way to becoming one of Australia's most successful iron ore stocks.

Last calendar year, as the world fumbled it's way through the GFC, Atlas graduated from explorer to producer. This year, as the iron ore price rises, the company is getting ready to start it's second mine. A third is on the way, and should help Atlas hit an annual production target of 12 million tonnes of premium-quality direct shipping ore (DSO) by 2012. That is when the financial numbers underpinning Atlas become seriously interesting, as the following back of the envelope calculation demonstrates.

We'll start with the background. BHP Billiton and Vale have negotiated a new quarterly pricing mechanism to replace annual price-fixing, a system which in part helped to trigger a crisis in relations between Australia and China, and the jailing this week of an iron ore sales team working for Rio Tinto. Ore quality will vary under the new arrangement, and discounts (and premiums) will be applied on the level of impurities such as phosphorous, alumina and silica that the ore contains. But a number to file away is US$110, because that seems to be the new average price of a tonne of iron ore.

When that price is applied to the 12 million tonne annual target of Atlas you discover directly a business generating revenue of US$1.3 billion. The next step requires a bit of guesswork, but it's a fair bet that half of that revenue, say about US$650 million, will stick in the Atlas accounts as gross profit. The accountants will then soak up their share in depreciation and other charges, but when you convert the US dollar revenue stream to Australian dollars at today's exchange rate of US92 cents to the Aussie dollar, Atlas suddenly become a company with a market capitalisation which stands at less than two years of its projected gross profit A$1 billion value on the market against A$705 million in projected annual gross profit from 2012.

All of those numbers are in the "best guess" category but they're not hard to work out, and will be done soon by a stockbroker close to you. Minesite is happy to be first to take a stab at what Atlas will look like. And this is just the start of what should be a sustained growth path, paved with a combination of mine developments, rising production, and corporate deals.

As it currently stands, Atlas is the producer of around one million tonnes of iron ore a year from a start-up mine called Pardoo. Next cab off the rank is a mine called Wodgina. After that, depending on planning and approvals, come mines at Abydos and Mt Webber. As an occasional visitor to these remarkably remote locations Minesite's Man in Oz can vouch for the ore in the ground (also a non-JORC code compliant comment), and is happy to take the word of David that ore reserves are not an issue for Atlas. What is an issue, and one which is being cleverly resolved, is access to roads, railways and ports.

In early March Atlas stitched up a merger agreement with the smaller Aurox Resources on what looked like very generous terms: one Atlas share for every three Aurox. But the deal had little to do with ore in the ground, given that Auroxs primary asset is a big deposit of magnetite, an iron ore which requires large licks of capital to be developed - and by large we're talking no change out of A$1.3 billion, versus A$12 million for a modest-sized DSO project. "The cost structure for magnetite projects is 50 to 100 times higher than a DSO", David said. "Its a pretty easy equation to think through". What Aurox does have going for it is access to capacity in Australia's biggest iron ore export centre, Port Hedland.

So, the Aurox merger is much more of an infrastructure play than a grab for ore in the ground. An earlier Atlas deal was about ore in the ground. That was the merger with Warwick Resources, which gives Atlas access to another iron ore mining district, close to the BHP Billiton's inland hub at Mt Newman.

All of which adds up to a business which has cash flow (small but growing), a mine development pipeline, and assets ideal for joint venturing in the shape of two magnetite deposits, Ridley, which is already on the books of Atlas, and Balla Balla, which comes with Aurox. The introduction of an Asian steel mill keen to secure future supplies of iron ore pellets, of the type produced from magnetite ore, looks like the likely outcome for those two assets. And while that works its way through the pipeline, Atlas will get on with its preferred business of selling high-value DSO ore.