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Atlas Iron Is On The Verge Of Becoming A World Class Iron Ore Producer

By Our Man in Oz

Not many Minesite readers get a first hand opportunity to see the latest remarkable developments in the Australian iron ore industry for themselves. So Minesite’s Man in Oz has done it for you. Last Friday, as a guest of Atlas Iron chief executive, David Flanagan, Minesite’s Man made the 1,600 kilometre trek north from his home in Perth to spend a day whizzing around the remote and rugged Pilbara region of Australia’s north-west in a lightweight helicopter, flitting from Atlas project to Atlas project. It wasn’t the first such trip undertaken by Minesite’s Man. The first one was back in the late 1960’s, when the first ore was being exported from BHP’s Mt Newman project, So, in a way, this latest visit was both a trip down memory lane and an eye-opener, because Atlas is on the verge of an astonishing burst of growth, and to seeing it up-close clearly demonstrates why the Atlas share price has soared more than six-fold from A60 cents a year ago to A$4.00 today.

In a nutshell, Atlas is potentially on the verge of becoming a world-class iron ore exporter. It will start small, but it will grow, because the Australian iron ore industry - under pressure from Chinese demand - is on fire. The big two, BHP Billiton and Rio Tinto cannot keep pace with that demand despite a rolling series of project expansions. And the big new player appearing on the horizon, Fortescue Metals Group (FMG), will also make only a modest dent in China’s insatiable appetite for steel. That’s why everyone in the iron ore industry is about to be rewarded with a price hike varying from 70 to 85 per cent. That upper limit reportedly reflects Chinese acceptance of the freight advantage which comes from buying in Australia rather than Brazil – it’s 10 sailing days from Oz as against 35 from coffee country.

It’s at Port Hedland’s busy airport, where Minesite’s Man meets Flanagan on Friday morning. The day in the air starts with a quick buzz over FMG’s port facilities and the first extraordinary sight on an extraordinary day is that there’s a ship at FMG’s freshly-completed berth. It’s only a 70,000-tonner and is part of the commissioning process, but it is a first, and it signals the near-end of of FMG’s A$3.5 billion adventure in developing a mine, building a railway, and constructing a port just across from one of BHP Billiton’s loading facilities. Flanagan is as interested as Minesite in FMG’s milestone because there is a chance that he will be exporting out of the FMG wharf if commercial terms can be agreed, or from one of the “common user” berths run by the State Government.

“We’re still waiting on a reply from FMG but it is one possibility for us,” Flanagan says, from 200 metres above FMG’s first ore stockpile. “It’s most likely that we’ll start shipping off the government wharf but were keeping all options open.” Those options start with Atlas making its first shipment in August from the small, but rich, Pardoo iron ore deposit just 75 kilometres from Port Hedland. The aim is to ship out one million tonnes in the first year. The ore will initially be sent by truck to the port. At a price approaching A$100 a tonne, and on an operating cost of between A$30 and A$40 a tonne, the profit margins available in iron ore in this boom market become obvious. That humble million tonnes will generate a profit for Atlas of at least A$60 million.

Fix in your mind that A$60 million profit from just one million tonnes of ore, and then travel with Minesite in Flanagan’s helicopter from Pardoo to the next suite of projects which fall within an area designated Abydos. It’s here that Atlas has struck the big time by consolidating a series of leases held by other miners. For a modest outlay of roughly A$10 million, satisfied in cash and shares, Atlas has put its foot on more than 100 million tonnes of ore, and perhaps a lot more, because the simple truth about so many of the company’s tenements is that they have never seen a drill bit. The full potential of what Atlas is targeting is best seen by visiting the company’s latest presentation delivered by Flanagan in Sydney and available as the top item in the Latest News section at the Atlas home page at www.atlasiron.com.au.

It’s in that presentation - a copy of which almost disappeared out the helicopter front door, if it had actually had one - that the Atlas objectives can best be seen. The target is to put a direct shipping ore resource of 160 million tonnes on the table by 2010. Production should be at one million tonnes in 2009, rising to six million tonnes by 2010, and 16 million tonnes in 2011. In money terms the cash flow estimate is slightly more than A$400 million for 2010, rising to around A$550 million in 2011 – this for a company capitalised on the stock market today at A$1 billion. It’s also before Atlas does anything with the billion tonnes of low-grade magnetite ore that’s probably best developed with a fat-cat partner - like a Chinese steel mill - sometime in the future and after access is won to a nearby BHP Billiton railway line.

It’s when Flanagan starts talking about the magnetite potential of Atlas over lunch at the Abydos exploration camp about 150 kilometres inland from Port Hedland that Minesite’s Man starts to find all the many facts and figures a bit indigestible – like the ham and cheese rolls served by Atlas inside a fly-proof tent. It’s a lot easier for a novice investor, or an old journalist, to consider one (just one) of the multiple iron ore deposits likely to be developed, so let’s start with a block of material known as Trigg. Drilling so far has revealed intersections such as 42 metres assaying 60.3% iron, and 52 metres at 58.9%. Resource numbers are yet to be calculated but it’s easy to see Trigg containing more than 50 million tonnes of ore – in a single hill. Run the A$100 per tonne price across Trigg and gasp because you’re looking at A$5 billion worth of iron ore. Five years ago, the same hill, undisturbed for four billion years, was worth one-fifth of today’s value, about A$1 billion, and wasn’t worth considering for development and the cost of hauling its ore to port.

It’s the prices being paid by China that have changed everything in the iron ore business. It’s why FMG is Australia’s 12th biggest company, soaring from a position outside the top 300 two years ago, and it’s why Atlas is a top 100 company, a position reached in the little more than four years since the company was floated as Atlas Gold in December 2004. That original name became redundant within a year of listing, when opportunities emerged in the iron ore business and Flanagan seized them gleefully.