Here's a scenario for you:
- You are a high-cost producer in an industry where you do not control the price of your product.
- You have a relatively high debt load that had investors worried only a few months ago when the price of your product plunged precipitously.
- You found a way to make more of your product (great!), however you will need to invest (borrow more) to make the production start and it will probably cost slightly more to produce than your product right now.
Does it make sense to proceed?
This is the question that the board and management team of Atlas Iron Limited (ASX: AGO) had to contend with in the first quarter of 2017, after the company completed its Definitive Feasibility Study (DFS) on its holding at Corunna Downs in Western Australia.
Here's what they found out:
- Initial annual production of 4Mtpa (annual production of 14.5 Mt last year)
- C1 cost estimate in the range of A$37 to A$43/wmt (average of US$29/wmt)
- Full cash cost estimate in the range of A$49 to A$55/wmt (average of US$38/wmt)
- Life of Mine 5 to 6 years with potential to extend
- Capital Expenditure estimate of A$47M to A$53M to develop project
- Life of mine breakeven price estimated at ~US$50/dmt
Full Steam Ahead!
With the iron ore price sitting at US$79 per tonne currently, the mine appears to make a great deal of sense. However, there's no certainty that the iron ore price will remain above US$50 per tonne.
Is now the time to buy?
Atlas reported full cash costs of A$50 a wet metric tonne (wmt) and C1 costs of A$34 per wmt in the most recent quarter.
In FY 2017 Fortescue Metals Group Limited (ASX: FMG) expects average C1 costs to be US$12 to US$13 per wet metric tonne, below even BHP Billiton Limited (ASX: BHP), and well below Atlas.
Although Atlas is constantly eating into its stockpile of available resources to pull out of the ground, it seems that it would be a risky decision to spend $50 million starting a mine that will most likely increase your average cost of production at this time.
It could threaten the recovery that has seen the share price rocket higher.
