heading for new low 60c

What's wrong with AGO?

AGO used to be one of my favorite stock that I will invest or trade it whenever its share price drop. I still remember that I brought my first AGO share at around $2.00 a share back in 2010 and sold it at $4.00 in 2011. Since then, AGO has changed.

Year to day, the share price of AGO dropped a massive 60% compare with 20% drop for MGX, no change for FMG and 10% up for BCI. The drop in iron ore price isn’t an excuse. The management should take 100% blame.

To work out AGO’s true cost per ton was never an easy task for me. Until Atlas Investor Presentation June 2013, the company still only tells us cash cost of 50 dollar per ton. But I work out that its true cost is more like 80 dollar per ton from its latest quarterly cash flow. Then, Diggers and Dealers Presentation confirmed my estimation. But only after reading the latest annual report and latest presentation (slides 11), I realize that AGO’s all in “total” cost per ton is way higher than 80 dollar. AGO has finally gave us a clear insight of its cost structure.

To calculate AGO’s total cost per ton using AGO’s own 2014 guidance:
Let’s assume that average iron ore price for 2014 is US$110 per ton or A$122 per ton.
1. Reduce price received by 6% for moisture: A$122 * 94% = A$114
2. Pay 9% for royalties: A$114 * 91% = A$104
3. Pay A$51 per ton C1 cash cost: A$104 - A$51 = A$53
4. Pay A$19 per ton amortization and depreciation: A$53 - A$19 = A$34
5. Pay A$4 per ton for corporate and admin: A$34 - A$4 = A$30
6. Pay A$2 per ton for exploration and evaluation: A$30 - A$2 = A$28
7. A$122 – A$28 = A$94 per ton
That is, if AGO receive A$122 per wet ton for its iron ore, it’s all inclusive cost is A$94 per ton.

The above calculation explains why AGO only made 14m underlying profit in 2013.
695m revenue – 14m profit = 681m cost
681m cost / 7.4 million ton production = A$92 per ton

At current iron ore price of A$150 per ton, AGO is doing ok. Next quarterly report will be good. But looking forward, A$92 – 94 cost per ton don’t pass my stress test.

Furthermore, AGO says it needs 326m capex for 2014 and 138m capex for 2015. Which means AGO needs to spend all its existing 414m cash reserve. Well, it can’t spend all its cash reserve because it needs at least 250m cash for working capital. Therefore, AGO will have to load on another 300m debt on top of existing 285m debt to cover the capex for next 2 years. Don't forget that the current 285m debt is in US dollar term, it is 316m debt in aussie dollar.

The question is what profit will AGO make for the next two years? 14m a year isn’t going to be enough.

I sold AGO for a loss after I read its annual report. After careful analysis, I brought MGX and BCI for my iron ore play. Only if the current strong iron ore price stays long enough, otherwise I expect that AGO’s share price is heading for a new low, 60c maybe. I don’t think I will trade or invest in AGO again anything above 50c a share unless the management make a change and do a lot more on reducing cost and capex.