So much for low iron ore prices forcing junior producers out of the market…
Following its decision to voluntarily suspend trading of its shares on the ASX, pending the outcome of an operational and financial outlook review, Atlas Iron Limited (ASX: AGO) today announced it will restart production at its West-Australian mines.
Atlas said it has already recommenced mining at the Abydos mine, whilst the Wodgina mine will recommence next week.
Counting down the days…
According to an ASX media release, Atlas formed a "collaboration agreement" which applies to the two aforementioned mines. Combined the Abydos and Wodgina mines produce approximately 9.0 million tonnes per annum (mtpa) of iron ore.
The collaboration agreement will reduce Atlas' breakeven cost to $US50 per tonne. This figure is however subject to an AUDUSD exchange rate of 78.5 cents and a production run rate of between 14 and 15mtpa. It compares "to the current benchmark price of approximately USD$60/dmt," the media release stated.
The company also said the restart of the Mt Webber mine in September will target a similar cost base, "with shipping from Sept Qtr targeting an additional ~6Mtpa and a total Pilbara production target of 14-15Mtpa by year-end."
To build balance sheet flexibility, Atlas said it plans to conduct a capital raising which could include participation from shareholders, institutional and sophisticated investors as well as certain directors and contractors. Details of the raising will be announced prior to a meeting scheduled for June 19, 2015.
"This is nothing short of an outstanding result for everyone involved directly and indirectly with Atlas," Chairman David Flanagan said. "We'd also like to thank our collaborating contractors for their engagement."
Parties to the two-year collaboration agreement include: MACA Ltd (ASX: MLD), QUBE Holdings Ltd (ASX: QUB) and McAleese Ltd (ASX: MCS). Interestingly, if Atlas generates a positive operating cash flow from the Abydos and Wodgina mines it'll pay 25% of the positive net cashflow to these contractors.
Another key point of the agreement read:
"The parties will meet monthly for the period of the agreement to assess the rolling 3 month forward schedule to determine operating margins. Where forward sales that generate positive operating margins are not possible or minimum volumes have not been delivered in the previous or coming month, collaborating contractors and/or Atlas may either recommend suspension or termination of the collaboration agreement with 30 days' notice."
Should you take part in Atlas Iron's capital raising?
I can only feel worried for the contractors, employees and stakeholders involved in some of these small iron ore miners because, chances are, tougher times lay ahead. It pains me to say it but if I were a shareholder in Atlas, I'd look to get out of the stock whichever way was quickest and most lucrative.
Even at $US50 per tonne; Atlas will not be competitive with the likes of Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Brazil's Vale and Fortescue Metals Group Limited (ASX: FMG). Each of whom are producing hundreds of millions of tonnes of iron ore at a cash cost significantly below $US50 per tonne (some lower $US20 per tonne!).
