Atlas Iron (ASX: AGO) released what I thought to be impressive results on Tuesday. However, the market reacted by pushing the share price down from recent highs of $1.18 earlier this month to a closing price of $1.01 today. Admittedly there are macro environmental factors affecting all stocks, including Atlas Iron, such as the much speculated future iron ore price.
Atlas Iron's half-year results included:
- Record revenue of $588 million (up 104%)
- Underlying EBITDA $200 million (up 912%)
- Statutory profit $74 million (compared to FY13 loss)
- Record 5.1 million tonnes shipped iron ore (up 53%)
- Cash on hand of $389 million (after spending $201 million on investing activities)
- A 3% reduction in cash costs per tonne of iron ore mined
- Forecast production increase with the Mt Webber expansion approved
Considering Atlas Iron is one of the largest iron ore miners not to have rail access, its costs of production and shipping are competitive and these are forecast to continue to decrease as production increases. Further, a deal providing rail access to move iron ore (versus using road trains) would significantly improve its all-in cash costs and would surely be welcomed by the market.
The financial results, production results and forecasts alone make Atlas Iron a compelling investment, however when compared to its peers the value gap appears significant:
| Atlas Iron (ASX:AGO) |
BHP Billiton (ASX: BHP) |
Rio Tinto (ASX: RIO) | BC Iron (ASX: BCI) |
Fortescue Metals Group (ASX: FMG) |
|
| Price to Earnings Ratio | 9.23 | 15.96 | 9.31 | 5.37 | 6.30 |
| Price to Book Value | 0.61 | 2.73 | 2.47 | 2.98 | 3.19 |
| 12-Month Share Price Performance | (32.1%) | 5.5% | 1.4% | 28.3% | 23.4% |
As mentioned above, there are a number of factors affecting listed stocks, many of them outside the control of management. Further, no two companies are ever equal, however the above comparison does illustrate what appears to be a a significant discreprancy between Atlas Iron versus its peers.
Therefore the question is whether Atlas Iron represents significant value or is it a value trap? If I knew this answer without a shadow of a doubt, I wouldn't be writing this article. However for what its worth I believe it just may represent value and I expect the share price to rally back to a price closer to its current net tangible asset (NTA) per share of $1.67.
One further point to consider is the possibility that one of the bigger players will make an play for Atlas Iron, which currently has a market capitalisation of $970 million. If this was to happen, I would assume a take over price of $1.50-$2.00 would be required for the board to recommend any such approach to its shareholders.
Foolish takeaway
So how do I explain the recent poor performance of Atlas Iron's share price? I can't. I will therefore be putting it down to Mr. Market, who, as stated in Benjamin Graham's 1949 best seller The Intelligent Investor, is often irrational. This approach has made Warren Buffett one of the richest people alive. Yes, the iron ore price may fall as has been predicted for many months (but has yet to materialise) but with competitive costs of production, Atlas Iron should be able to weather any falls until the smaller players leave the market.
