The market reacted negatively to the announcement that Atlas Iron (ASX: AGO) was immediately going ahead with its Mt Webber mine in the Pilbara region of WA. The board approved the $146 million project in a bid to meet a long term haulage target of 12 million tonnes annually.
The mine will be fully funded with cash in the bank and will start producing the steelmaking ingredient in the June quarter of 2014. In its second phase, its forecasted output will be around 6 million tonnes a year and would allow the company to meet its production rate for some years.
However, for analysts and the market, the news wasn't what they wanted. Currently, Atlas will haul ore from Mt Webber and its other nearby mines to Utah Point port. This is why Matthew Hope, an analyst from Credit Suisse said he was "disappointed" when the company failed to implement an agreement with rail infrastructure providers.
Mr Hope went on to say that "an estimated $39 a tonne cost of port and haulage highlights" that an agreement "would be a catalyst for Atlas". Atlas is currently negotiating with various infrastructure owners including Fortescue (ASX: FMG), Aurizon (ASX: AZJ) and Gina Rinehart's Hancock Prospecting but, according to managing director Ken Brinsden, it's making "strong progress".
There is no doubt that a rail link would complement the business and lower costs dramatically but whether or not that brings a healthy stock price is uncertain. With three projects already online and another about to start production, Atlas will have five mines in around five years. However, with so much volatility and slow falling trendlines, the iron ore market looks to be a very competitive market place until at least 2017.
Foolish takeaway
With over supply and under demand of iron ore flowing from many countries around the world, investors would be wise to think twice before making the plunge in this stock. The connecting rail link would buffer the company's balance sheets but one doesn't have to be an analyst to know that if the one product the company sells is falling in value, then it doesn't bode well for the stock price. In addition, with so much uncertainty swirling over Chinese growth, investors may be even wiser to keep to the side lines.
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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
