Where does this thing close on Monday?, page-204

David Flanagan's first million was the hardest at Atlas

• by: Sarah-Jane Tasker
• From: The Australian
• January 23, 2012 12:00AM

ATLAS Iron boss David Flanagan suffered plenty of sleepless nights creating an iron ore miner, but he now has no fears about his aggressive expansion plans.

The business model for the West Australian mine seems simple: target incremental expansions without taking on debt. But launch that idea in a global financial downturn and the risks seem greater.

Flanagan is an optimist and despite having to overcome significant hurdles - including starting out with no one locked in to buy the ore - he stubbornly believed he could create an iron ore miner.

It started in 2004 with one employee. Today Atlas Iron employs more than 400 people with a market capitalisation of more than $3 billion.

"We got up and running because initially we didn't know what we could not do ... we thought 'we can go dig a hole and go into the iron space', not realising how competitive the infrastructure space is in Port Hedland," Flanagan says.

"It's that infrastructure that makes iron ore a valuable commodity, because without it it's just dirt."

The Perth-based company hit the 1 million tonnes per annum (mtpa) run rate in 2008 and Flanagan started to sleep more soundly, knowing that while there would still be hurdles, the Atlas team had done it.

They had got an iron ore mine into production and shipped the sought-after steelmaking commodity to China.

"It was easier to go from 1mtpa to 6mtpa than it was from zero to one, and it'll be easier to go from 6mtpa to 12mtpa than it was for 1mtpa to 6mtpa," Flanagan says.

"I had sleepless nights during the ramp-up to 1mtpa ... but I haven't had anything like that since."

A key strategy Flanagan was never going to compromise on was keeping the balance sheet clean. He did not want a bank telling the startup company what it could and couldn't do in its early days. In an unusual strategy for many mining hopefuls before the GFC, Atlas Iron did not have an offtake agreement with a Chinese company, which would have helped with funding. It also didn't go to the banks.

"In the very beginning, when we started our first mine, we decided as a business that there was enough risk out there in the marketplace and that we didn't want to have more risk in our business in taking on debt," Flanagan says.

"We didn't do a traditional bankable feasibility study. We did a study to work out what the capital cost was going to be and we spent the money and backed ourselves.

"The time we would've spent on doing the extra level of studies, we would've lost cashflow over that period, and the covenants we would've been given had we gone down the bank route would've limited our ability to grow our business."

Atlas Iron started its first mine - Pardoo - for about $14 million in equity in October 2008, the middle of the GFC.

Despite the "financial Armageddon", as Flanagan describes it, the Atlas team decided to put its head down and push on with hitting first production.

The company had already mobilised a mining fleet and weighed up the risk of pushing ahead versus the cost of hitting the brakes and then restarting once the financial crisis cleared.

"The worst-case scenario was we could have lost $2.5m and the best case was we would be off and running," Flanagan says. "We did it and then the market turned and that allowed us to get up and running. From that position, we then went and did the deal with the guys at Talison (now Global Advanced Metals) to acquire the right to use the Wodgina plant."

It was an opportunistic move: the tantalum price had dived, so Talison was keen to explore options for the use of its plant.

For about $15m, Atlas converted the tantalum plant to an iron ore plant, providing it with the next boost to increase production. "We had no substantial profits for the first three years, but I would do it all again," Flanagan says. "We were in the right place of the market when the price turned."

The company's approach towards funding may have altered slightly since the early days, but Flanagan remains wary of taking on too much debt.

His board also remains opposed to risking the balance sheet.

Flanagan says that if it does take on any debt, it will be small and there will be no restrictions on the team running its business the way it wants to.

"I don't want to have a banker telling me what I can and can't do," Flanagan says

"If we didn't have the flexibility during the GFC, we never could've bought into the Talison project, we never could've started the mine at Pardoo or Wodgina and did the acquisitions we did.

"Those things made our business -- we must retain the licence to operate like that."

The early Atlas strategy was to get into production as quickly as possible, and the then junior miner didn't have to strike a rail deal with one of the majors to get its ore to port: it started with the trucking model.

But by the end of 2015, the miner plans to be at 15mtpa, which is when it will need to transport its ore to port via rail.

"We've been involved in the infrastructure space in and around Port Hedland for seven ears," Flanagan explains. "We have different port allocations and when you add them up it gets to 46mt. That's because we've been in the area for seven years."

Over the next 18 months, the company wants to expand from 6mtpa to 12mtpa and then 15mtpa by 2015. It plans to break through the 40-46mtpa target by 2017-18.

"They are all big licks, and are all big ramp-ups, and there'll be pinch points in there. But there is nothing more difficult than entering the market for the first time," Flanagan says.

The market can expect the iron ore miner to outline its infrastructure strategy to move to 15mtpa by year-end and also explain its case for 46mtpa.

"The thing that would add the most value to the company is if we can demonstrate our infrastructure option," Flanagan says.

"The market would start to give us value in our share price for the 46mtpa. I would expect it would be a major re-rating."

Don't expect the strategy to include setting the company up as a lucrative takeover target. Flanagan is passionate about his company and is not prepared to hand it over and see someone else reap the rewards.

He explains that many of the takeovers which are "unsolicited" actually start with someone saying, "I'm prepared to talk to you".

But if you knock on Atlas Iron's door, be prepared for the managing director to say: "It's nice to receive an expression of interest but we are not prepared to engage.

"If you want to really genuinely make an offer for the company, because we are listed we have to respond to it, and we will, but we're not going to make it easy for people at all," he says.

"The people who work for us want to be part of building a company. We are not motivated to sell the company."

While his company may not be for sale, Flanagan's team are keeping their eyes peeled for opportunities and they already have a shopping list they are closely examining.

The miner has made about 40 acquisitions to date. Flanagan says he doesn't feel the need to buy anything but global conditions may throw up something.