the australian june 22, 2009

http://www.theaustralian.news.com.au/story/0,25197,25668051-643,00.html

June 22, 2009

Atlas knows where it's going with Pilbara purchase


WHENEVER Pilbara iron ore is mentioned, the names BHP Billiton, Rio Tinto and, more recently, Fortescue quickly follow.

Now there's a new name muscling its way on to investors' radar -- Atlas Iron.

The iron ore miner increased its reach across the Pilbara region of Western Australia last week when Warwick Resources, in which it has a 20.9 per cent stake, bought Hannans Reward's iron ore tenements.

Atlas managing director David Flanagan's dream of expanding the company is fast becoming a reality. The miner recently announced plans to raise up to $116.7 million to increase its Pilbara operations and revealed exploration success at its Mt Webber, Wodgina and Turner River projects near Port Hedland -- with top grades of 60.9 per cent.

Atlas started four years ago as a $9m company with two employees. It has grown to a 160-strong workforce, with plans to treble that in the next two years.

"There is an opportunity in the Pilbara for a business like ours, and if all of our dreams come true, in five to seven years' time we could be a 20 million tonne business," Flanagan says. "We've gone out and built a land position that is close to the port and infrastructure, and what that has delivered us is low capital cost projects.

"Pardoo, Abydos and Wodgina will be the three lowest capital cost iron ore projects in Western Australia. Because they are so low capital cost, we believe they will deliver the highest rate of return that people have generated previously on an iron ore investment. Our strategy is to make strong returns. Even though our assets are relatively small compared to the majors, the profits can still be really big."

The miner is targeting exports of about six million tonnes next year, rising to 12 million tonnes by 2012. But infrastructure remains the biggest hurdle for new mines, with BHP and Rio not budging on calls to allow third-party access to their infrastructure.

Fortescue has led the campaign to open up the majors' ports and railways, and has proved it can work by allowing smaller rivals to use its infrastructure. Atlas first shipped to China last year from Fortescue's port. "We are taking advantage of the political environment. Fortescue built a railway and port on the basis that they would share it and they have given us access to their infrastructure. They haven't just talked about it, they've done it," Flanagan says.

Under the Warwick deal, Hannans Reward will transfer iron rights at the Jigalong project 150km east of Newman to Warwick, with Atlas providing technical and financial support to develop the project. Hannans will receive $5.25m cash and shares in both Warwick and Atlas as consideration for the rights. Atlas will lift its stake in Warwick from 19.5 per cent to 20.9 per cent, as repayment for a $1.155m loan.

The combined Hannans and Warwick projects would have about 225m tonnes of direct shipping ore and a ground position of about 5000sqkm.

It is understood that Atlas sees its major stake in Warwick as a strategic position to help it spread its influence through the Pilbara and target access to infrastructure.

Rio and BHP revealed a massive $US116 billion ($144bn) merger of their West Australian iron ore operations earlier this month, sparking hopes from the junior sector that they might relax their strong objection to sharing infrastructure.

"If BHP took a good look in the mirror, they would realise it is the right thing to do. But at the moment they appear to be more concerned about shareholder return than long-term benefits to Western Australia," Flanagan says.

He supports West Australian Premier Colin Barnett's call for state agreements to be reviewed following the announcement of the merger.

Flanagan says the joint venture created the risk of more barriers to infrastructure, but strong Chinese demand offsets this.

"China wants more ore from different suppliers," he says. "We can get to 12 million tonnes per annum without getting on a BHP or Rio railway."

Atlas is open to further opportunities in the region but says it is not "on the prowl".

A steady stream of juniors have been knocking on Atlas's door, but nothing has tempted the company yet.

"There haven't been any opportunities that are jumping out at us. We have got to be footloose and fancy free," Flanagan says. "With Warwick, when we decided to move and do that, our board and management team worked through that opportunity and made the decision in 48 hours. I signed the contract in a transit lounge at Hong Kong airport. That's how our business is done: you don't take two weeks to look at an opportunity -- you just go for it. The Warwick move is an option. We are not about to go and make a bid for them."

There is market speculation that FerrAus, another emerging east Pilbara player, could be targeted in further consolidation for the sector.

More movements are expected as the juniors realise the benefits of teaming up.

"Starting a mine is the single most difficult thing I've ever done, and now that we have the first one up and running, the others are coming along easier," Flanagan says. "There are going to be some who want to do it by themselves and some who don't, and we don't see consolidation as necessarily going out and bidding for companies. It could be acquiring tenements, forming joint ventures, or alliances. Atlas by nature is flexible and we want people to want to do business with us. We don't want people to leave the table thinking we have ripped them off."

Atlas is expected to continue its strong run in the mid-tier sector, providing an alternative for many juniors that will struggle to turn their exploration success into production.

"You grow oak trees from acorns. WMC started off as a tiny company that mined a small gold deposit and from that they bought into Norseman, Kambalda and Kalgoorlie. They built this company which is now a big part of BHP," Flanagan says.

"We aren't saying that Atlas wants to become this huge miner, but you never know. We are all working hard and don't have a vision on slowing down our growth profile.

"We aren't just going to have a business that works on growth opportunities in boom times -- we are working flat out right now to take advantage of what is in front of us."