atlas iron limited unlocks substantial value

Good report from The Motley Fool on AGO
=============================================
Atlas Iron Limited unlocks substantial value

By Chris Koenig - February 27, 2014

Atlas Iron (ASX: AGO) has delivered better than what was expected with a massive revenue increase of 104% compared with the previous corresponding period (PCP). Net profit after tax was $74 million, compared with a loss in the PCP. This was due to the combined effect of higher tonnes shipped and higher average price of iron ore. That price went from averaging US$98.50 in the first half last year to US$115.60 this half.

Of considerable significance, capital expenditure and will drop quickly throughout the rest of the current calendar year, as development of the Horizon 1 program comes to completion.

With focus firmly on Pilbara port allocations and strong reserves and resources, there is substantial value to be unlocked over many years. Current production is expected to be in excess of 10Mtpa for the current financial year. By late next year, the target is 15Mtpa. During the 2017 calendar year the expectation is for 30Mtpa and eventually 46.5Mtpa.

As for all iron ore miners, such as BHP Billiton (ASX: BHP), RIO Tinto (ASX: RIO), BC Iron (ASX: BCI) and Mt Gibson (ASX: MGX), Fortescue Metals Group (ASX: FMG), profitability is dependent on the price of iron ore. Estimation of the price has defeated many a forecaster in the last 18 months but, with hindsight, it has held up very well over that period.

I expect that the price will continue to exceed US$100pt for at least 10 years as China, India, and other southeast Asian nations just cannot get enough iron to meet their needs to build rail, bridges, buildings, roads, etc. Competition from Vale (NYSE: VALE) in Brazil will be a threat but Australian producers have a significant freight advantage being closer to export destinations.

Another reason that favours consideration for Atlas is the ongoing lowering of cost of production. It averaged $48.4 per tonne in the last half compared with $49.1 per tonne in the PCP. This means that the price of iron ore would need to go lower than US$50 per tonne for profitability to be annulled.

Foolish takeaway

A further benefit for Australian exporters is the potential drop in the Australian dollar with respect to the American, as iron ore contracts are made in the latter’s currency.

Therefore, as an increasingly low-cost producer that is rapidly increasing output, Atlas is my choice of iron ore miners. In my opinion, it’s a buy at up to $1.25 per share.