Extract from: Resources Rising Stars Friday 28th February 2014
Analysts retain buy recommendations on Atlas amid strong results and growth outlook.
Atlas Iron’s twin messages of strong cashflow today and strong growth tomorrow resonated with investors as the Pilbara iron ore miner released its interim profit result and updated its outlook.
The consensus among analysts was that the result ($74m net profit versus $256m loss) was in line with the market’s expectations and the earnings outlook was bright.
But particular attention was paid to the fact that Atlas is on track to complete its Horizon 1 capital expenditure, under which it has built five mines in five years, by the end of this calendar year.
Suggestions by MD Ken Brinsden that the company was also close to securing an infrastructure solution that would pave the way for the Horizon 2 developments, with the further big increases in production which that would bring, were also warmly welcomed by the market.
“Atlas is cheap if it never develops past Horizon 1 truck haul to port,” said broker BBY, which has a $2 price target on the stock. “It is very cheap if it can generate a reasonably priced rail solution that unlocks McPhee and south-east Pilbara assets.”
Credit Suisse noted that Atlas had $89 million in net cash at the end of December. “We forecast that it will complete the expansion to 13-15mtpa and retain $100 million in net cash,” it said. “We maintain our price target of A$1.30 a share and an outperform rating.”
It was a point picked up by BBY. “When Atlas drew down its debt in 2012, it expected to have a net debt position of ~A$200 million at December 31, 2013,” BBY said. “In fact, it has almost a A$100 million net cash position, ~A$300 million better than it expected.”
Baillieu Holst described the profit as “a good first-half result”, saying the current financial year outlook “appears rosy after the company upped its full-year guidance to 10.2-10.7 million tonnes”.
Bank of America Merrill Lynch described the result as “a strong set of numbers”. BAML has a price objective on Atlas shares of $1.30.
With production set to rise from around 10.5 million tonnes a year currently to about 15 million tonnes as Horizon 1 is completed - in the process increasing revenue as capital expenditure falls - Atlas’ strong cashflow is being recognised as a highly attractive investment proposition.
At the same time, the growing prospect of production doubling from there on the back of an infrastructure deal is widely seen as a lucrative prize which could lift Atlas into the next league of resources companies.
As BBY said, it’s cheap without an infrastructure deal, it’s very cheap with one.
AGO Price at posting:
$1.02 Sentiment: LT Buy Disclosure: Held
