Shares of iron ore miner, Atlas Iron Limited (ASX: AGO), have fallen nearly 4% in afternoon trade following the announcement of its half-year results this morning.
In the six months to 31 December 2014, the $188 million company announced a loss of $1,086 million in the wake of a falling iron ore spot price and a huge non-cash impairment totalling $834 million.
For miners, an impairment of this magnitude usually arises when the price of a commodity (in this case iron ore) falls so much that the carrying value of an asset on its balance sheet must be significantly reduced to reflect the fall in value of that asset's earnings power. For Altas, the impairments were taken against exploration and development assets across the Pilbara region.
However, excluding the impairment charge, Atlas still made a loss for the half, with underlying EBITDA (earnings before interest, tax, depreciation and amortization) coming in at a loss of $14.8 million.
Despite shipping 6.89 million tonnes of ore during the half, Atlas's revenue fell 23% to $450.8 million, as the average price received plunged to just $66.24 per tonne, from $116.61 per tonne in the prior corresponding period.
Ultimately though, Altas's woes come from its high production costs.
Whilst giants Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) would likely make money with iron ore spot prices of $US40 per tonne or below, Atlas's All-in cash cost (which includes everything except interest expense, capital expenditure and one-off restructuring costs) was $67.29 per tonne.
Looking ahead, Atlas is targeting an all-in cash cost of between $60 and $63 per tonne and shipments of 6.8 to 7.2 million tonnes in the second half of the financial year.
Commenting on today's results, Managing Director Ken Brinsden said: "While the price of iron ore has fallen considerably, Atlas demonstrated a track record of consistently reducing costs during the half. Following updated guidance released today forecasting significantly lower costs during the second half, Atlas is well placed to benefit from an improvement in the Australian dollar price of iron ore."
Should you sell your Atlas Iron shares?
Despite management's best intentions, I wouldn't want to hold Atlas Iron shares today. With expectations of a greater fall in Chinese demand coupled with increases in supply, the price of iron ore will likely fall over time. Given that Atlas is at the higher end of the cost curve, investors may be better off looking for other opportunities.
