Struggling iron ore junior Atlas Iron has advised it will take up to $900 million of write-downs in the first half of the 2015 financial year after the slump in commodity prices that has undermined the value of its operations in Western Australia's Pilbara region.
The impairment, announced in a statement late on Tuesday, looks set to send the company plunging into the red for the first half, as Atlas said its "normalised" earnings before interest, tax and depreciation were "approximately break-even", leaving aside one-off restructuring costs.
Managing director Ken Brinsden said Atlas had rapidly slashed its cost base after the sharp drop in iron ore prices earlier this year, leaving the company with a "very strong leverage to even a modest uptick in iron ore pricing".
He said the impairment of Atlas Iron's exploration and project assets in the Pilbara reflected "the changing equity markets and assessment of asset values in light of revised forward pricing" but noted that the company remained "well within the contractual terms of its debt financing agreements".
Atlas, which had $205 million in cash as of September 30, has suffered from a halving of iron ore prices this year, which have forced smaller companies in particular to axe capital spending and operating costs. It has cut jobs by 10 per cent this month and has lowered its full-year guidance on costs after raising cost-cutting targets recently to $75 million to $100 million by June 2015.
Shares in the company, one of the worst performing resource stocks this year, have slumped 88 per cent in the past 12 months. The iron ore spot price has dropped 65 per cent in the same timeframe, and was at $US67.90 a tonne on Tuesday. Atlas shares closed at 14¢ before the announcement on the write-down was released.
Despite the cost-cutting efforts, Atlas was named by Citigroup earlier this month as the most at risk from a balance sheet perspective among the pure-play iron ore companies. It said that at its iron ore price forecasts, or $US65 a tonne in 2015 and 2016, Atlas will not be able to repay its $US270 million loan facility due in 2017 from cashflows.
Atlas noted on Tuesday that its cost-cutting program had delivered all-in cash costs of about $65 per wet metric tonne for deliveries to China in November, down from more than $80 per tonne in March.
The write-down, of between $700 million and $900 million, relates to a reduction in the carrying value on Atlas Iron's books of its Horizon 1 and 2 projects, which were originally valued based on acquisitions made by the company in 2009-2011. The exact amount of the impairment is subject to forecast iron ore prices, exchange rates and market conditions when assessed on December 31.
It said that both the royalty relief announced recently by the WA government and recent drops in global oil prices and declining sea freight costs would help its financial position.
"The royalty relief package offered by the state government is likely to make a material difference during the subdued pricing environment," Mr Brinsden said.
