And from The Oz. Can't see any realistic situation at this late point where averaging down is sensible and am now having real concerns that CR will raise enough or that debtors will not pull the pin if it is only partially subscribed. I would be happy if it just trades again at this point.
Atlas Iron (AGO) 12c (trading halt)
Iron ore’s man-of-the-hour David Flanagan dubs the climate for the ferrous dirt over the past 18 months as “remarkable”, which is one way of putting it.
A year and a half ago, iron ore changed hands for $US100 a tonne and Flanagan’s Atlas bore a per-tonne cash cost of $US85 a tonne — and commanded a $1 billion market capitalisation.
Now the commodity wallows at a 10-year low of $US44 a tonne and is selling less than cabbage on a tonne-for-tonne basis (and just as palatable).
By April this year, Atlas was receiving $US46 a tonne from the output of its three Pilbara mines at a cost of at least $61 a tonne.
“Unless we did something amazing the company was looking at $25 million cash outflow in the month of April,’’ he said.
Well, miracles do occur and it’s apt that Flanagan’s prezzo in Melbourne yesterday — one of many to flog Atlas’s $180m equity raising — was littered with references to messiahs and second comings.
In an unprecedented compact, Atlas’s six contractors agreed to waive rates in return for 25 per cent of earnings. “We are buying a saving today by promising a portion of cashflow in future,’’ Flanagan says.
The miraculous goodwill extended to the WA government, which offered royalty relief and road haulage concessions, as well as Fortescue chief Andrew Forrest, who took an undisclosed stake in Atlas. “There were so many people riding to the company on white horses that we almost put up a stable,’’ Flanagan quips.
But what about the 11 per cent price ore-pocalypse on Wednesday night, the metal’s biggest ever one-day decline?
Fortunately for Flanagan, by the time he got to the podium he could point to a 3.5 per cent bounce in iron ore futures.
With an all-in per-tonne cost of $US47 a tonne, Atlas, in theory, is still underwater. But the economics are enhanced by a cap-and-collar hedging arrangement, by which 2.5 million tonnes are forward sold at $US52-$US53 a tonne.
It remains to be seen whether this price reflects fundamental demand, or is more of a wild punt by derivative traders after a night on the turps.
Flanagan also stresses the natural hedge afforded by the dollar, which is 80 per cent-correlated to iron ore price movements. When the US dollar-denominated iron price falls, so too does the Aussie dollar and — voila — the producer’s received price improves. The raising, which closes on Monday, has attracted $16m from retail punters and $41m from the contractors.
“I’m not saying Atlas is Bambi but it’s a business worth getting behind,’’ Flanagan says.
Should Atlas’s 33,000 shareholders do just that?
We urge caution, partly because the hedging covers only a fraction of the envisaged output of 14-15 million tonnes a year.
The offer, at 5c and with an option exercisable at 7.5c, is pitched at a 58 per cent discount, but don’t forget Atlas shares have been cocooned in a trading halt since early April.
Forgive us for shooting Bambi, but investors craving iron ore leverage should pile into BHP Billiton and Rio Tinto for the lowest cost production, as well as yield and diversification.
AGO Price at posting:
12.0¢ Sentiment: Sell Disclosure: Held
