analysts comments on rail, page-33

This from Westpacs Investment site today. Explains some lethargy.

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Our fair value falls 15% to AUD 3.40 a share following reductions to production growth forecasts. If we assume spot prices remain constant our valuation increases to AUD 6.60 a share.

Recommendation Impact
At AUD 2.88 a share our recommendation is Accumulate. Mon 30 April 2012 Event Analysis
-- Atlas Iron shipped one million tonnes (mt) of iron ore in the March quarter, 15% below the December quarter. Causes of the shortfall included cyclones Heidi and Lua and the breakdown of the Utah Point ship loading facility. We expect the fall to prove temporary with a rebound to 1.3mt this quarter. The average iron ore price received (delivered to China) rose 3% to USD 124 per tonne. Cash costs of AUD 42 - 45 per tonne remain competitive with the majors and within full year guidance. Our fair value falls 15% to AUD 3.40 a share following reductions to production growth forecasts. Our valuation assumes iron ore prices fall as illustrated in Figure 1. If we assume spot prices remain constant our valuation increases to AUD 6.60 a share. At AUD 2.88 a share our recommendation is Accumulate.

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Good operating performance continues but valuation remains dependent upon production growth being achieved. Current production rates are 5 - 6 million tonnes per annum (mtpa) but the ‘Horizon 1’ growth project targets 12mtpa by late 2014. Existing production is trucked on public roads to Port Hedland for export to China. Expansion requires construction of three new mines and a 100km private haul road. Capital expenditure of AUD 630m will be internally funded by cash balances of AUD 362m and annual operating cash flow of over AUD 300m.

Growth to 12mtpa will take longer than we previously expected. The long held target of ‘…12 mtpa by 2012…’ slipped late last year to ‘…12mtpa in FY13…’ and by last February became ‘…15mtpa by 2015…’. The March quarter update indicates 12mtpa won’t be reached until at least 2014 as shown in Figure 2. The consequence sees a downgrade in our fiscal year 2013 production forecast by 17% to 7.5mt and our 2014 forecast by 8% to 11mt.

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Atlas commendably grew production for far lower cost than peers but future growth will be harder to achieve. Sector consolidation means acquisition options are effectively exhausted. Production growth will be expensive and complex with risks of delays and cost blowouts. To its credit, Atlas continues a low cost growth strategy utilising partnership agreements. Development of a rail line is being investigated with QR National, a reputable partner with deep pockets. A joint feasibility study is due by the end of 2012 with haulage expected from 2015. In addition, port expansion beyond 15mtpa will be via the North West Infrastructure (NWI) joint venture. Its South West Creek port project offers an additional 35mtpa of port capacity but with shared development costs.