Is Atlas Iron Limited back from the brink?

Atlas Iron Limited (ASX: AGO) continues production at 2 of its Pilbara mines as contractors slash costs

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Junior iron ore miner Atlas Iron Limited's (ASX: AGO) shareholders might have something to rejoice about after all. Today the company announced that it would keep two of its Pilbara mines operating.

Atlas and its shareholders can thank its key contractors, including MACA Ltd (ASX: MLD), McAleese Ltd (ASX: MCS) and Qube Holdings Ltd (ASX: QUB) who appear to have slashed their fees, in order for Atlas to continue operating. There's no word on the effect that will have on the contractors earnings – we'll just have to wait and see, but it probably won't be pretty for some.

Atlas says mining will continue at its Abydos project, as the company depletes previously mined stockpiles. Mining at Wodgina is expected to recommence as soon as possible in May, with processing and haulage to restart shortly after.

The miner says it was able to continue operations, rather than suspending production as a result of substantial cost reductions at these mines. Atlas also says up to 65% of Abydos' production is lump product, which attracts a premium price, compared to its standard product.

As a result, Atlas expects to be cash-flow positive in May – with all-in costs expected to be less than US$50 per tonne. A more than 20% jump in the iron ore price from low US$40 per tonne to its current level of around US$56 per tonne will also help.

Despite the good news, Atlas shares will remain suspended for the time being.

Atlas shareholders will be hoping the iron ore price remains around current prices, a further plunge below US$50 per tonne will mean management and it contractors' efforts have been in vain. On that front, there was some good news overnight too. Brazil's Vale announced that it was considering cutting production by up to 30 million tonnes per annum, in an effort to reduce supply and hopefully a recovery to more sustainable levels in the share price.

That follows on from BHP Billiton Limited's (ASX: BHP) recent announcement that it was deferring a major project, which would have the effect of slowing its advance to achieve 290 million tonnes of production per year.

Will we see other miners act rationally and back off on production, or will we see a 'prisoner's dilemma'? As an example, a company like Rio Tinto Limited (ASX: RIO) could continue to expand production – even ramp it up further, at the expense of other producers backing off.

Motley Fool contributor Mike King has no position in any stocks mentioned. You can follow Mike on Twitter @TMFKinga The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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