Atlas has good assets, particularly the long-life projects in its Horizon Two pipeline, which are not being priced by the market. These (potential) projects have a low projected cost-base, albeit they require large cap-ex to get them up and running. At the moment AGO has low debt, a high yield, and in my analysis the company represents good value at current levels. It has large port allocations as well and is, in my view, a strong candidate for a takeover.
Yes, AGO's SP is subject to iron ore pricing and the iron ore price is down 30 per cent over the last year. The Fe ore market is a very interesting topic from a strategic perspective, so let's look at it.
RIO, BHP and VALE (as well as FMG) have been ramping up supply in an oversupplied market and plan to continue to up production. Why? Why apparently shoot themselves in the foot?
Because, there is a bigger game afoot than today's, or next quarter's, profits. The big three in the world scene are killing the competition for medium and long-term gain. High cost iron ore operations are feeling the pain, with some already closing, due to the strategy of the big three. Also, the Chinese are reportedly moving from purchasing via long-term contracts to purchasing more on the spot market, due to the recent price fall (i.e. due to the strategy of the big three). Let's not forget, BHP and Rio are key protagonists in the development of the spot market, for a reason.
And let's look at the backdrop. There is fundamental long-term increasing demand for steel (and therefore iron ore), and not just from the Chinese. Has anybody been to India lately? What about Indonesia and, well, the whole of the developing world needs a lot of steel and this truth will not change for many, many years to come.
So what we have is the supply-side manufacturing low iron ore prices for strategic benefit. How far will they push it? How much of the competition can they kill? Can AGO hang-on until the light at the end of the tunnel starts to get brighter?
I think so. I think AGO is far enough down the cost-curve to avoid short-term annihilation plus it has attractive assets which suitors value and which currently the broader market does not.
AGO Price at posting:
56.5¢ Sentiment: Buy Disclosure: Held
