Atlas Iron Limited (ASX: AGO) took a big step forward to relisting after it raised $180 million in fresh capital as the iron ore price hovers around a five-month high.
The struggling iron ore miner sold new shares at a heavy discount of 5 cents a pop, according to The West Australian, and Fortescue Metals Group Limited (ASX: FMG) chair Andrew Forrest is believed to have put his hand up for the capital raising.
The offer price for new shares is right at the bottom of the estimated range but it's still a great outcome for Atlas because investors are still willing to tip money into the miner despite predictions by most analysts that iron ore is on the verge of entering another free-fall.
Atlas Iron last traded at 12 cents a share before it went into a trading halt on April 7 as the price of the steel making ingredient crashed in half over the preceding 12 months – making the high cost producer financially unviable.
Interestingly, the iron ore price bottomed at $US46 a tonne three days after Atlas went into voluntary suspension and has bounced close to 40% since to over $US65 a tonne.
But that party isn't expected to last as analysts from Bank of America Merrill Lynch become the latest to predict an imminent correction in the commodity due to an oversupply of ore.
It isn't only the analysts who believe in this bleak outcome. The iron ore futures market remains in steep "backwardation". This means the price of the ore is more expensive for immediate or near-term delivery than it is for longer-term delivery as shown in the chart below.
Under normal circumstances, commodities are in "contango" where the price is higher for longer-dated deliveries to reflect holding costs, and the longer term price for iron ore is sitting under $US50 a tonne, which doesn't bode well for Atlas and other higher cost producers.
Atlas's founder and celebrated Western Australian business personality David Flanagan is doing a "Steve Jobs" by returning to the helm of the miner in an attempt to keep the ship afloat. Shareholders will be hoping he can do to Atlas what Jobs did to iPhone maker Apple.
Flanagan has already managed to convince contractors to adjust their remuneration as part of his cost cutting drive to bring Atlas' cash cost down to $US50 a tonne.
Flanagan thinks he can do better still – and he will need to as many analysts believe iron ore will retest the $US46 price point before the end of this calendar year.
I can understand why Forrest is happy to put money into the capital raising as he needs to demonstrate his confidence that iron ore prices won't force Fortescue to its knees, but as I have pointed out before, the revival of Atlas is bad news for shareholders and for the industry in general.
This is because Atlas will probably generate next to no return on equity for shareholders if the ore price falls towards $US50 a tonne even if the miner can still cover its costs.
What's more, Atlas will be able to continue to supply the oversupplied market and this will keep the demand-supply imbalance to persist for longer. I bet Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) would privately be unhappy about this outcome.
The speed at which marginal supply of the commodity is removed from the market is paramount to any quick recovery in the ore price.
Look at oil. Shale oil and gas companies in the US have been far more reactive in idling rigs as the crude oil price tumbled and the oil price has subsequently made a far more convincing recovery.
Shareholders should brace themselves when Atlas resumes trading as it will take a big plunge. This is not only because of its heavily dilutive capital raising (Atlas' current market cap is $110 million) but many will use that as an opportunity to exit what has become a highly speculative stock.
