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Stock: Atlas Iron

Stock code: AGO

Share Price: $3.91 (as at close 15/07/11)

P/E Ratio:  15.80  (Sector P/E 13.14)

Market Cap: $3,229,000,000

Broker Calls

Credit Suisse – OUTPERFORM

JP Morgan – OVERWEIGHT

Invesco Smaller Companies Fund – BUY

Patersons – BUY

Morningstar – BUY, $4.60 price target

Argonaut – BUY, $4.30 valuation

Morningstar – BUY, $4.60 price target

Shadforth Financial Group – BUY

Atom Funds Management – BUY

 

Investor Centre: Atlas Iron Limited

Company news: Atlas Iron Limited

 

Based in the Pilbara region of Western Australia, Atlas Iron (AGO) has several key iron ore projects strategically located within 150 kilometres of Port Hedland. The pure play has quickly become a favourite with analysts, brokers and investors alike due to positive results, a maiden profit and a soaring share price – up 89% over the past year and up 1,615% since listing in 2004.

Positives for AGO are that it has exposure to the surging iron ore market and Chinese growth, a strong cash flow and a solid track record of growth both organically and via acquisition.

Last week in his column “Analysts paint a bright future for Atlas Iron” Bob Kohut pointed out that analysts were forecasting growth not only for Australia’s mining sector in general but also for AGO in particular. And analysts are certainly bullish on the iron ore miner – we were able to track down no less than nine buys from brokers, analysts and fund managers from Credit Suisse to Patersons.  

Analysts pointed to a number of factors that make AGO an attractive investment option:

1. Strategic location – AGO’s two producing properties are situated within 150 kilometres of Port Hedland. The proximity gives AGO a significant cost advantage, as their ore can be transported by truck over public roads.

2. The company has two additional properties in the area under stgelopment.

3. An acquisition strategy is underway, with the potential for significant expansion of the company. The company recently acquired Giralia Resources NL (GIR).  Giralia has similar assets and the addition of their resource inventories should be a catalyst for higher earnings.  Currently, the company is actively pursuing another junior Australian miner, FerrAus.  These acquisitions would turn AGO into a 3 billion dollar company.

4. Atlas Iron has a unique production model that takes advantage of low strip ratio mines, a substantial cost advantage especially when coupled with its strategic location.

5. AGO’s mines in current operation produce 6 million tonnes of direct shipping iron ore a year with production expected to double by 2012 to 12 million tonnes a year.

6. AGO is in a strong cash position, with operating cash flow of $120 million reported in the March quarter 2011 as well as total net cash of around $300 million.

7. The company recently reported their first profit – $30.1 million for the six months ending December 31, 2010

Description

Initially listing as Atlas Gold on the ASX in 2004, AGO is currently focussed on iron ore exploration and production for Asian markets, taking advantage of the surge in demand in China and elsewhere in Asia over the past decade. It is currently in discussions with FerrAus for a friendly takeover, which is discussed below. For now, we’ll look at Atlas as it stands today.

Atlas’ projects cover a massive area of over 16,000 km2 in the Pilbara region in north-east WA, plus it has two high grade iron ore projects within the mid-west of the mining state. According to Atlas, the projects are “located in areas highly prospective for iron ore, gold, nickel and base metal mineralisation.”

The projects include the established Pibara iron ore mines at Pardoo and Wodgina Operations near Port Hedland, advanced projects nearby at Abydos and Mt Webber, greenfields projects in the Newman area and mining leases in the Midwest. Production in the four Pilbara projects is projected to reach 12Mtpa by the end of 2012. AGO continues to pursue acquisitions predominantly within the Pilbara region. An exploration program has been rolled out with a substantial increase in the resource and reserves position so far.

AGO states on its website that Atlas has a world-class asset in the Ridley Magnetite Project, which is situated on the Pardoo mining leases. “With a resource of 2 Billion tonnes and a reserve of 970 million tonnes, Ridley has the potential for a mine life of over 30 years producing high quality concentrate for export,” it says.

AGO has also signed an agreement to expand capacity at its Wodgina mine in the Pilbara, WA by 75% and has entered into a 6-year infrastructure agreement with Global Advanced Metals.

Financials

Although previous years’ financials don’t paint a pretty picture, AGO is in a good financial health and is likely to report a maiden full year profit of approximately $150 million for FY2011, with cash on hand of $300 million and no debt.

Just last week Bob Kohut noted in a feature in TheBull PREMIUM that AGO looked like an attractive opportunity for Growth or GARP (Growth at a Reasonable Price) investors.  “The PEG Ratio suggests AGO may be undervalued in terms of its growth potential,” wrote Kohut. “This ratio and the P/E are particularly impressive when you consider AGO has only recently begun to turn a profit.” You can read the full article here.

Atlas Iron reported a maiden half-year profit on February 24th this year, with NPAT of $30.11m for the half-year to 31st December 2010. Revenue was $201 million, five times higher than the same period the previous year. An increase in sales volumes, higher iron ore prices and reduced operating costs have all contributed to the strong performance.

Financials for AGO:

 

2008A 2009A

2010A

 Sales Revenue ($m)

 0.0 26.4  84.8

 EBITDA ($m)

 -44.03 -66.30 -6.35

 EBIT ($m)

 -44.38 -69.98 -23.20

 Reported NPAT ($m)

-38.3 -63.1 -40.8

 Price/Earnings

 0 0 0

 Dividend Yield (%)

 0 0 0

 Net Profit Margin (%)

-238.9 -20.6

 ROE (%)

 -20.9 -31.6 -4.9

 Net Debt/Equity (%)

-78.1 -62.2 -43.2

Link to company Earnings Report: Atlas Iron Limited Half Year Earnings Report – to December 31st, 2010

Analysts’ views

Brokers, analysts and fund managers give Perth-based Atlas a thumbs-up, recognising its rapid but well-managed growth. “We believe Atlas Iron’s track record of ramp-up and further capital-light growth potential position it well,” Macquarie analyst Martin Stulpner said in a client note. “Atlas Iron is differentiated (from its peers) by the simplicity of its production model, taking advantage of low strip ratio mines that are located close to the port. This results in relatively low cash cost, despite the relatively cumbersome transport model of hauling ore by truck on public roads.” In upgrading the miner to outperform, Macquarie put a 12-month target of $4.10 on Atlas.

John Rawicki, State One Stockbroking has a buy on the iron ore producer and explorer, pointing to its large tenements in Western Australia’s Pilbara region and the likely acquisition of FerrAus, saying that the acquisition will lift AGO’s iron ore reserves by 300%. “With two fully-operational mines, the company produces six million tonnes of direct shipping ore annually…production is expected to double by 2013,” says Rawicki.

Richard Batt of Shadforth Financial Group, who is also confident about AGO’s prospects, says the company shipped 1.63 million tonnes of iron ore for the six months to December 31, 2010, and is targeting production of 12 million tonnes within the next two years. The company recently reported a maiden net profit of $30.1 million for the six months to December 31, 2010. Batt expects the company’s financial performance in the 2011 second half to be significantly stronger in response to increasing sales volumes, higher iron ore prices and reducing operating costs. “The company has also successfully acquired Giralia Resources NL (GIR), which is a strategic and financial fit, with both having complementary assets that significantly increase combined resource inventories, potentially providing  for higher earnings,” says Batt.

Batt prefers Atlas Iron to another pure iron ore play Fortescue Metals Group, because it’s coming off a lower base and offers more potential to surprise on the upside. Fortescue’s share price is down about 0.5 per cent this calendar year, whereas AGO is up 30%. He says Atlas Iron’s solid business generates strong cash flows, with operating cash flow of $120 million in the March quarter lifting net cash to about $300 million. 

James Georges of Patersons Securities also has a buy on AGO, citing its operational mines producing 6 million tonnes of direct shipping iron ore a year with production of 12 million tonnes a year targeted by 2012. “An excellent track record of resource growth and low capital expenditure requirements instils confidence,” says Georges. “However, single commodity exposure dependent upon Chinese demand increases risk…the shares are only suitable for risk tolerant investors.”

It comes as little surprise that Patersons Asset Management, which specialises in buying resource stocks in its Australian Resources Opportunities Fund, thinks along a similar vein. During the recent downtrend in commodity prices, the fund took the opportunity to stack up on their holdings in resources stocks, including AGO. Patersons thinks that on the back of recent strategic acquisitions, Atlas Iron now has the size and scale to immediately benefit from the high iron ore price. “Atlas and FerrAus have recently executed agreements that will consolidate its South East Pilbara iron ore assets and create an entity worth in excess of $3 billion,” says Patersons. “The combined group will have approximately 1 billion tonnes of direct shipping ore resources with production targets of 12Mtpa by the end of 2012, 22Mtpa from the North Pilbara projects by 2015 and 20Mtpa from its South East Pilbara projects by 2016.”

Peter O’Connor, resources analyst with Merrill Lynch, pinpoints Atlas Iron (AGO) as a potential takeover target for local suitors, as well as China and India-based bidders wanting to get a foot-hold in Australia to lock in future supply.

Invesco Smaller Companies Fund is overweight in AGO and Argonaut also had a buy on AGO back in February when the share price was sitting at $3.83 with a valuation of $4.30. You can read its report by clicking here.

Based on Thomson Reuters data, 79% of analysts have a buy on AGO, 21% have a hold and 0% have a sell.

FerrAus takeover

Atlas is in the process of pushing through an off-market takeover offer for FerrAus, offering one Atlas ordinary share for every four FerrAus ordinary shares, which represents an implied offer price of $0.858 per FerrAus share, a 34% premium based on the last close price of Atlas shares on 24 June 2011 of $3.43. FerrAus directors have advised shareholders to accept the offer unless a better offer comes through.

In terms of the benefits to Atlas Shareholders, AGO claims that:

1. it will have a more diversified asset base with strong operations in the North Pilbara and South East Pilbara;

2. a stronger DSO iron ore resource base with a DSO iron ore resource inventory of close to 1 billion tonnes;

3. the deployment of Atlas’ experience in stgeloping and operating iron ore mines will unlock maximum value from FerrAus’ iron ore assets;

4. AGO will have an enhanced scale and access to capital markets with a market capitalisation of around $3 billion;

5. it will have improved access to infrastructure with its entitlements at Port Hedland’s inner harbour Anketell;

6. it will have an increased production profile, with the company targeting production levels over 20Mtpa from the South East Pilbara alone by 2016.

“Atlas’ stgelopment and production expertise, strong cashflows from operations and robust balance sheet mean that Atlas is well positioned to advance the South East Pilbara iron ore assets and maximise the value of these assets for the benefit of Atlas and FerrAus shareholders,” it says in a presenation on the proposed takeover.

Key iron ore projects to be acquired by FerrAus include the projects outlined below and FerrAus and Atlas believe that there is exploration potential to further grow these resources.

  #FOTO:1178:400#

Click here to read AGO’s report on Ferraus takeover

Risks

It’s hard to get away from the fact that AGO is a pure play and as such is fully exposed to the vagaries of demand for iron ore, which really comes down to Chinese growth. If China stumbles, so will AGO. On top of this it has exchange rate risk, high capex for low-grade mines, mine stgelopment risk and risk associated with the proposed mineral resources rent tax (MRRT).

Conclusion

AGO is set to buy FerrAus to create a $3 billion company as the iron ore miners aim to get the most out of their combined operations in Western Australia’s Pilbara region. The miners claim that their deal is better than the takeover bid for FerrAus from Hong Kong investment company Wah Nam, and FerrAus directors are recommending that shareholders take the offer.

FerrAus chief executive Cliff Lawrenson said the consolidation of Atlas and FerrAus’s south-east Pilbara assets would create a larger, well-funded company. “Ultimately, however, we believe there are significant additional benefits for all stakeholders flowing from a combination of 100 per cent of both FerrAus and Atlas,” he said.

It remains to be seen whether this proves to be the advantage that is being sold to investors, but if the number of bullish analysts is any indication, this is a stock with all the right stuff. Iron ore, that is.

>>Back to the newsletter to view other articles – July 16th 2011

Please note that TheBull.com.au simply publishes broker views on this page. The publication of these views does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.