· Pilbara consolidation continues. Pilbara producer BCI this week announced a $250M bid for IOH, in order to bolster its presence and production profile in the region. The bid follows that of the successful Aurizon-Baosteel bid for Aquila Resources in May. For Aurizon, it was an entry into the Pilbara region. · Who will be next? The bids by BCI and Aurizon come at a time when the iron ore sector has been strongly out of favour with a depressed spot price. Investors have punished iron ore stocks, particularly the juniors, while rotating into seemingly more attractive metals exposures such as nickel, copper, zinc, gold, and bauxite. · Assets requiring spend. What was pertinent for both bids were that the targeted companies possessed assets requiring significant capital investment (e.g. AQA’s West Pilbara Iron Ore Project, IOH’s Bucklands), but were being heavily discounted by the market. AGO is another Pilbara player where the market seems to give little plausibility on its expansion plans being crystallized. · Atlas Iron (AGO) - a Pilbara producer with growth opportunities. AGO has recently established itself as a 12Mtpa producer from the Pilbara, recently completing its Stage 1 development at Mt Webber. The company’s Stage 2 completion is expected in December 2014 quarter, by which time AGO will be targeting production of 15Mtpa. · Infrastructure solution can unlock success. To go beyond 15Mtpa production, AGO most likely needs a partner that can assist in providing an infrastructure solution, particularly concerning rail, to unlock its sizeable resources of over 1Bt DSO. On the port side the company has access to Utah (15Mtpa) and South West Creek (31.5Mtpa) which provide it with 46.5Mtpa of capacity. · Number of key interested parties. Potential interested parties in AGO would likely include Fortescue (FMG) and Hancock – which have their own rail networks - X2 Resources, Anglo American, and Glencore – who may seek to establish Pilbara operations, and other China steelmakers similar to Baosteel, who would be keen for offtake. · Shareprice sell-off provides opportunistic entry. The AGO shareprice has plummeted 44% YTD, as the leverage to the iron ore price has worked against it in a downbeat environment. Investors have been wary of the AGO’s relatively high cost operation, but herein lies the opportunity. The company is an attractive entry into the play on iron ore prices turning around, while crystallization of an infrastructure solution would certainly enhance costs efficiencies.
AGO Price at posting:
69.5¢ Sentiment: Buy Disclosure: Held
