Atlas shrugs

Yesterday Atlas Iron announced a new $146 million mine expansion at Mt Webber. Atlas Managing Director Ken Brinsden spoke to Ross Greenwood at 2GB about the plans where he received a very positive response to his plans.

A more hard-nosed assessment is provided today by Credit Suisse:

• Announcement of Mt Webber mine go-ahead was disappointing on cost guidance of $56/t FOB, ahead of our $48/t estimate (and vs $46-$50/t for current mine suite). At $56/t, the mine is marginal and has a negative DCF after $146mn capex. We believe extreme transport (ca.A$28/t for 230km on highway) elevates the cost. This provides a negative read-through for Corunna Downs prospect as a trucking operation, so we cease expansions in our model at Mt Webber stage 2 (12Mtpa limit) for highway trucking. Our target price reduces to A$1.05/sh (A$1.15/sh prev.) in-line with DCF, but rating remains OUTPERFORM.
• No profit margin at our iron ore prices: Mt Webber’s A$56/t FOB is $74/wmt CFR after $6/t royalties and $12/t shipping with minicapes. Our US$90/dmt iron ore price from FY15 translates to realised A$83/wmt for Atlas blend, and the skinny $9/t cash margin is wiped out by depreciation. Mt Webber mining costs should be low with favorable stripping of 0.5:1, so the high costs apparently reflect the outsize cost of trucking 230km on highway ($28/t estimate) + the hefty Utah Point port charges ($11/t).
• Estimated A$39/t cost of port and haulage highlights the opportunities if a rail deal can be negotiated, so a rail deal would be a catalyst for AGO. If AGO could gain a rail haulage of A$20/t, and reduce port costs $3/t in its new stockyard 2, Mt Webber would generate $11/t margin vs A$1/t on current estimate. The feasibility study on a third party rail JV was due to end in JunQ, but unclear whether AGO will have an update in Jun Q report.
• Our DCF sum-of-the-parts valuation declines to A$1.05/share (from A$1.05/sh) following lower Mt Webber valuation.

I know it’s cheap but given my view on iron ore it can always get cheaper.