Atlas Iron Offers Cheapest Bet on Ore’s Rebound: Real M&A
By David Stringer and Angus Whitley August 03, 2014
For acquirers betting iron ore prices will rebound, Australia’s Atlas Iron Ltd. (AGO) is the cheapest potential target.
Iron ore has fallen 29 percent this year, eroding profit margins at Atlas and contributing to a slump in the stock that’s driven the A$595 million ($554 million) company’s valuation to the lowest among all its peers relative to profit. With iron ore forecast to pull out of its slump, Atlas plans to more than triple production and has sufficient loading space set aside at the world’s busiest bulk terminal.
“Someone could buy them for the port or someone could buy them for the assets,” James Wilson, an analyst at Morgans Financial Ltd. in Perth, Western Australia, said in a phone interview. “It’s the point where most people are at their most vulnerable, prior to the turn in the cycle upwards.”
Atlas, based in Perth, may appeal to suitors including Chinese steelmakers prepared to build a more cost-efficient rail link to the port, according to Credit Suisse Group AG. Last month, China’s Baosteel Group Corp. and an Australian rail operator paid a 39 percent premium for Aquila Resources Ltd., which Credit Suisse says has less attractive ore deposits than its neighbor Atlas.
That takeover, which valued Aquila at A$1.4 billion, gave Baosteel and its bidding partner Aurizon Holdings Ltd. a share of a A$7.4 billion iron ore mine, port and rail project in the Pilbara region of Western Australia.
“Baosteel has gone and paid a lot of money for Aquila, for what looks to be a larger but less attractive iron ore deposit than that which Atlas Iron is busy uncovering at Corunna Downs,” Matthew Hope, an analyst at Credit Suisse in Sydney, said in a phone interview.
Port Rights
Paul Armstrong, a spokesman for Atlas who works at Perth-based Read Corporate, declined to comment on the prospects for any deal.
With projects such as Corunna Downs, Atlas’s resources in the Pilbara total 1.7 billion tons, the company said in a June presentation. It shipped a record 10.9 million tons in the year ended June 2014 and holds rights to enlarge its loading allocation at Port Hedland to 46.5 million tons a year.
The port is the gateway to China for iron ore producers including BHP Billiton Ltd. and Fortescue Metals Group Ltd.
Any buyer of Atlas, which hauls its ore to the coast in trucks, could boost profitability by lowering transport costs, said Hope at Credit Suisse. Port and trucking charges are as much as five times higher than similar costs for larger producers, he said. Rail Access
Atlas remains in talks about rail access with potential partners including Fortescue and Hancock Prospecting Pty, which both have railroads in the Pilbara, Atlas Managing Director Ken Brinsden said in February.
“There are a lot of assets in the portfolio that could really benefit from an infrastructure solution, if someone with an infrastructure solution took them out,” said Wilson at Morgans. Fortescue is among possible buyers, he said.
Yvonne Bell, a spokeswoman for Perth-based Fortescue, declined to comment.
In May, Atlas doubled its estimate for the resources at Corunna Downs and reported successful exploration at Miralga Creek, near the existing Abydos mine.
“The more credible Atlas’s expansion projects are, the more valuable the port allocation becomes, and the more likely it is to be taken over,” Trent Barnett, head of research at Hartleys Ltd. in Perth, said by phone. “But you have to be pretty confident in iron ore prices.”
Iron Glut
Growing output in Australia, the world’s largest iron ore exporter, and Brazil created a glut that is forcing the closure of mines in China, the biggest consumer. Producers including BHP and Rio Tinto Group are betting increased volumes from their lower-cost mines will more than offset falling prices.
Prices may climb 10 percent to $105 a metric ton by the end of 2015, based on the median of analyst estimates compiled by Bloomberg. Iron ore with 62 percent content delivered to Tianjin port in China fell 0.4 percent to $95.20 a dry ton on Friday, according to The Steel Index Ltd.
Barely turning a profit at current prices, Atlas’s earnings would be especially sensitive to a strengthening market, said Barnett. Atlas had all-in cash costs of about $70 per ton in the three months through June, compared to a received price of about $78 a ton for its standard product, it said last month.
Including debt, Atlas trades at less than 3 times its estimated earnings before interest, taxes, depreciation and amortization for the year ending June 2015, according to data compiled by Bloomberg. That’s lower than all of its more than two dozen global peers, the data show. BHP trades at almost 7 times estimated earnings for the same period.
AGO Price at posting:
65.0¢ Sentiment: Buy Disclosure: Held
