The price of iron ore is teetering close to a 10-year low again but, after slashing costs, Australian small-cap miner Atlas Iron says it can still make a profit in the vital Chinese market, even up against giants Rio Tinto and BHP Billiton.
Atlas’s stock hasn’t traded since April 2, shortly before it disclosed its three mines had to shut and it would need fresh capital and a new business model to survive. Two months earlier it posted a A$1.09 billion ($816 million) half-year loss.
It laid off two-thirds of its employees, sub-leased office space in its Perth headquarters, secured financial backing to get back in production and is selling the bulk of its output forward.
“We needed to pull out all the stops to get our costs of production down to a competitive level if we wanted to move forward,” Atlas Managing Director David Flanagan told Reuters.
Atlas suspended mining when the iron ore price fell to $47 a tonne as it was losing $15 on each tonne mined. It has since established a $50 break-even price, helped by a profit-sharing arrangement with contractors, and the last of its three mines reopened last week.
Minnows such as Atlas became collateral damage as BHP , Rio Tinto and Fortescue Metals Group competed with each other to ramp up production and squeeze out high-cost Chinese producers.
Collectively, the minnows mine less than 10 percent of Australia’s annual 650 million tonnes of sea-traded iron ore and they have suffered the most from weak demand from China.
Atlas is not out of the woods yet, with Chinese steel demand under pressure from a weakening economy and a property sector slowdown. The slump in iron ore is likely to be protracted.
Atlas’s break-even price is far above the sub-$20 per tonne levels boasted of by Rio Tinto and BHP but is in line with other juniors, according to UBS, which calculates BC Iron needs $52 a tonne to generate cash and Arrium Ltd $51.
ORE PILES UP AT CHINESE PORTS
The spot ore price <.IO62-CNI=SI> hit a 10-year low of $46.70 in April before rallying but is going through another bout of weakness: it sank 3.9 percent to $52 a tonne on Monday as inventories swelled at Chinese ports.
Australia’s Department of Industry and Science has forecast more ore and less demand will hold the price down at an average $54 a tonne this year and $52 in 2016.
But Atlas is now selling a minimum of 80 percent of its output at fixed forward prices of between $52 and $59 a tonne using a variety of hedging instruments. The contracts are reset each quarter.
“If the iron ore price falls four bucks today and crashes to $48, it’s not going to affect the cash flow of the business,” Flanagan said.
A share offering aimed at raising up to A$180 million has already generated a A$43 million injection from Atlas contractors and a further A$15 million from shareholders, according to Flanagan. It opens for new investors next week.
Shareholders were able to subscribe for new shares at 5 Australian cents each, with 1 free attached option at 7.5 cents. Atlas stock last traded at 12 cents.
Contractors have also agreed to cap what they can charge in exchange for 25 percent of the cash flow from two of the Atlas mines for two years.
Atlas’s survival tactics are regarded as unique but some believe they could be a template for other juniors on the verge of collapse.
“Their ability to come back is nothing short of amazing,” said Morgans Financial analyst James Wilson. ($1 = 1.3351 Australian dollars) (Editing by Alan Raybould)”