-------------------------------------------------------------------------------- Volatility Index: High Recommendation: Neutral
Price 21 Apr 11 $3.64 Event Atlas Iron (AGO) reported March quarterly operations results. Impact Shipment rate sustained despite weather. As reported previously, shipments decreased slightly to 1.39mt (Dec q: 1.42mt), 5.6mt annualised, around 7% below AGO's target 6mtpa shipping rate. As with other producers, shipments were impacted by rain and cyclones during the quarter. However, the impact on AGO was relatively muted compared to others who experienced 15-25% qoq declines. AGO guided to 1.5mt for the June quarter (6mtpa annualised). Production impacted by rain. Mine production increased around 8% to 1,369kt (Dec q: 1,273kt), around 5.5mtpa annualised; however, ore processed declined 6% to 1,184kt (Dec q: 1,261kt), around 4.7mtpa annualised. This was driven by 36% lower processed tonnes at Pardoo, which was most heavily impacted by rain. In contrast, Wodgina tonnes processed increased 14%. Despite the lower volumes, AGO reported freight on board (FOB) cash operating costs of <$43/t, down from $45/t in Dec. AGO's shipments were entirely through Utah Point, enabling AGO to avoid third party port access charges. Cash flow increases on revenue kicker. AGO had cash of A$293m at end March 2011 (Dec: A$143m), of which A$53m was acquired with Giralia; the pre Giralia cash increase of A$97m was up on cash flow of A$34m in the Dec quarter. We estimate that AGO's prices increased strongly to around US$128/t FOB (prior corresponding period: around US$100/t). Given current contract and spot prices, we estimate further upside of around US$10/t in the June quarter. Expansion potential drives discounted cashflow upside. Given AGO's established track record of building capacity and sustaining expanded production, we update our discounted cashflow base case to include expansion to 12mtpa by 2012, as flagged by AGO management. This gives discounted cashflow of A$3.64ps (previously: $3.02ps). Achieving this depends on Utah Point being expanded and AGO securing expansion capacity before 2015. We estimate organic growth upside due to McPhee Creek at an additional A$0.95-1.00ps, of which we factor around 50% into our increased target price of A$4.10ps. Earnings and target price revision Financial Year 2011 earnings per share unchanged at A$0.29ps, Financial Year 2012 adjusted to A$0.51ps from A$0.61ps, Financial Year 2013 earnings per share adjusted to A$0.70ps from A$0.60ps. Target price increased to A$4.10ps from A$3.70ps. Price catalyst 12-month price target: $4.10. Catalyst: TRH investment decision; resource increases. Action and recommendation We rate AGO Neutral with an increased target price of A$4.10ps. AGO has sustained sales close to its 6mtpa target and we adjust our base case to include the planned Turner River Hub expansion. Further upside exists in developing McPhee Creek.
AGO Price at posting:
$3.68 Sentiment: Hold Disclosure: Held
