This was circulated around by one my broker mates a week or so...

This was circulated around by one my broker mates a week or so ago. Could be of interest to some of the shareholders here.

Quite a bit has been happening for Atrum since the last update that I provided.  Over recent weeks I have communicated with a lot of shareholders and provided my thoughts, however, please refer below for a more expansive commentary around what has taken place in the past 4-8 weeks.

What does the Export Sales Joint Venture mean for Atrum?
The terms for the JV have been finalised and announced yesterday morning.  My understanding is that Atrum will pay cost for the product (which I conservatively estimate being somewhere around US$100 a ton), then split the margin on the sale price at 60/40 in Atrum’s favour.  Given the rocketing coking coal prices (which if anything, look like being stronger in 2017), it’s fair to assume that the price for anthracite is increasing as well – despite being less transparent than that of coking coal (more on this below).  However, using a conservative average sale price for ACG anthracite of US$160 a ton, we can start to form a view of how this Export Sales JV looks for Atrum:

2017: 250,000 ton – using an estimated cost of US$100 a ton (US$25,000,000), with an estimated avg sale price of US$160 a ton (US$40,000,000), split of 60% - Atrum receives free cash flow of US$9,000,000
2018: 275,000 ton – (same pricing assumptions as above) free cash flow of US$9,900,000
2019: 302,500 ton – (same pricing assumptions as above) free cash flow of US$10,890,000
2020: 332,750 ton – (same pricing assumptions as above) free cash flow of US$11,979,000
2021: 366,025 ton – (same pricing assumptions as above) free cash flow of US$13,176,900

Clearly, the above earnings are a very rough estimate and will not provide the funding for capex that Atrum will require to get production at Groundhog up and running.  However, it puts them in a stronger position regarding their balance sheet and cash position.  No longer needing to rely on shareholders for capital, with steady free cash flow the company will have good leverage when they need capex funding from capital markets or debt markets.

The other positive of this comes via the relationships they will form with customers – as it is highly likely that the customers for ACG anthracite will also be the longer term customers for Groundhog anthracite.  Building trust and rapport pre-production with a working sales relationship will assist the transition to offtake agreements for Groundhog and any potential equity stakes at a project level.


Did the block trade announced mid December finally clear the overhang?
Since the board blow up in 2015 and the resignations of directors (and co-founders) Russell Moran and Gino D’Anna, there has been a perceived overhang of stock – between them, Russell & Gino owned close to 40m shares.  Basically, Argonaut Equity Partners (AEP) acquired 30,000,000 shares in Atrum in accordance with the terms of loan agreements between Russell, Gino and a syndicate of lenders (Russell and Gino each had separate loan agreements).  AEP then sold these shares via a block trade to institutional and sophisticated investors.  At the same time, Atrum raised $13.5m via a capital raise also to institutional and sophisticated investors.  So some significant shifts have occurred on the Atrum shareholder register.

In my opinion, this block trade has cleared the overhang of stock in Atrum.

As an aside, a Notice of initial substantial holder was submitted on the 23/12/16, stating that 21,525,000 shares (or 9.3%) had been acquired by entities controlled by Rod Jones – Rod is the CEO and MD of Navitas Ltd (NVT) – Navitas is ASX listed and has a current mkt cap of $1.8b.  Rod Jones along with Craig Burton (see below) led the syndicate of lenders for Russell and Gino’s loans.

This morning the company has announced the appointment of Director Craig Burton.  Some further detail is below as per the Atrum announcement:

Mr Burton has more than 25 years’ experience in financing, developing and managing emerging resource projects in Australia, Canada and the UK. He has co-founded numerous resource companies. Seven resource projects co-founded by him have advanced from exploration into production, including two that became ASX/200 companies.
Mr Burton invested $2.5 million in Atrum’s recent capital raising and is keen to assist the Board with a focus on advancing the Groundhog project.
Mr Burton is currently a non-executive director of two listed companies, Cradle Resources Ltd (ASX: CXX) and Capital Drilling Ltd (LON: CAPD).

Mr Burton said: “It’s an exciting time to be involved in Atrum. Groundhog is arguably the best undeveloped high-grade anthracite asset in the world. There has been a little publicised collapse in the global supply of high-grade anthracite, forcing steel-makers to use more metallurgical coal and, in turn, putting pressure on the market. This favourable market dynamic for high grade anthracite is likely to stay for a considerable period of time making the development of Groundhog an outstanding opportunity.”

Mr Burton (and associated parties) hold 5,000,000 shares in Atrum. In addition, the Company has agreed to seek shareholder approval for the issue to Mr Burton of 3,000,000 options to subscribe for shares in the Company exercisable at 70 cents each within four years of the date of issue. These options will be conditional upon Mr Burton remaining a director of the Company for at least 12 months.

An article from today’s Australian is attached which has additional detail on Craig Burton and some additional comments that are worth a read.  I view Craig Burton’s appointment as director as an excellent move for the board of Atrum.

What is happening with coal prices?
Mid-December the quarterly benchmark hard coking coal contract was settled at US$285/t. Up from US$200/t for the December quarter contract.  The strong contract result came about despite spot prices falling from over US$300/t to ~ US$270/t in just over one week.  It also represents the largest premium to spot since the June quarter in 2014, having settled at a discount for the December contract.  Typically, strength in benchmark pricing contracts indicates the likelihood of ongoing pricing strength for a commodity.

Traditionally, as a rule of thumb we could apply a 20-25% premium to the coking coal price to get a rough idea of the prevailing high grade anthracite price.  This is not currently applicable post the significant ramp up of the coking coal contract price.  However, it is fair to assume that the pricing for high grade anthracite will appreciate, the degree to which this occurs is dependent on the sustainability (or length of time) of higher coking coal prices.  Having said that, citing Craig Burton’s statement above:

“There has been a little publicised collapse in the global supply of high-grade anthracite, forcing steel-makers to use more metallurgical coal and, in turn, putting pressure on the market. This favourable market dynamic for high grade anthracite is likely to stay for a considerable period of time”

In the market, we have seen most listed companies with coal exposure run hard through the 2^nd half of 2016 – e.g. Whitehaven Coal (WHC) up ~145% since June 30; South32 (S32) up ~84% since June 30.  Atrum is at a very different stage of the cycle than these two companies and has a very different risk profile, however, the point is that at some stage investors looking for exposure to coal will start digging deeper to find stocks that are undervalued and still have the potential to benefit from the stronger coal price environment.  Atrum is one listed company that provides exposure to a world class asset at a cheap price.