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I am an Australian value investor. I have gone to full time investing this year (2012) at age 36 and am passionate about helping other Aussie investors succeed. My website is
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Edge Seven Pty Ltd
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  • ASX: AGO - Atlas Iron Limited 0 comments
    Nov 18, 2012 8:53 PM

    Does Atlas have the world in its hands?

    Atlas Iron (ASX:AGO) is an independent Australian iron ore mining company directly exporting from its operations in the Northern Pilbara region of Western Australia. Since listing on the ASX in late 2004, Atlas has grown rapidly and is now a member of the ASX100 index.

    Atlas promotes that it is proud of its reputation as an ethical company with a dynamic, can-do attitude.

    Does this business have a sustainable competitive advantage?

    Atlas Iron's competitive advantages come from three main areas.

    Firstly, Atlas has a one billion tonne resource base which potentially sees them mining iron ore for decades to come.

    Secondly, and possibly more significantly, Atlas Iron has secured port capacity of 46.5 million tonne per annum (Mtpa). The significance of the port capacity is that the physical limitations of the inner harbour at Port Hedland dictate that there is no more capacity. For Atlas, this is the key to their future growth.

    Thirdly, Atlas's current operations at Pardoo and Wodgina are within trucking distance to Port Hedland which has allowed the company to begin operations without needing the capital for a dedicated rail line. The road transport has however capped Atlas's scale to about 15 Mtpa.

    (click to enlarge)

    This leads to the opportunity currently open to Atlas. Atlas is looking at a rail solution for their south-east Pilbara deposits. This will not only increase Atlas' production capacity exponentially, but will also open up a host of Atlas deposits in the south-east Pilbara to economic development. However, the time frame to implementing this rail solution appears to be about five years away.

    Is it run by able and trustworthy management?

    Management has done a great job in securing the 46.5 Mtpa port capacity. The port capacity confirmation is a masterstoke as it essentially secures the company's place in Australian history as an exporter of iron ore for the long term.

    As of June 2012, the company has about $380 million of cash on hand. The company paid six cents in dividends in 2012 financial year despite running at a loss of 13 cents a share. And, when you consider that the company's cash burn in 2012 was $238 million, paying dividends may not have been the wisest decision.

    What are the risks facing this business?

    The biggest risk to Atlas Iron's business is the market price of their sole product being iron ore. Based on the past two years results (ie profit in 2011 and a loss in 2012), a quick glance at the iron ore price chart here suggests that Atlas needs an iron ore price of about $120 a tonne to break even.

    (click to enlarge)

    The biggest risk to an investor in Atlas Iron is funnily enough the sustainability of iron ore prices globally. For an investor, it is near on impossible to control the iron ore price risk associated with investing in a single commodity mining company. Low iron ore prices will mean an unprofitable business. While the company can always raise more capital to realize their future if their commodity price falls, the risk of further dilution of value for shareholders is high.

    Is it trading at a bargain price?

    Valuing a company that is asset rich and cash flow poor is not easy. One could argue that despite infrastructure assets and resources in the ground, if they can't be extracted profitably, the assets aren't worth anything. The correlation between the iron ore price (above) and the company's share price chart (below) is of no real surprise. The prized port capacity asset does leave the open-ended potential of Atlas Iron being taken over at a premium.

    Rank2011 Actual Valuation2012 Actual ValuationToday's Share PriceMargin of Safety2013 Forecast Valuation2014 Forecast Valuation
    Gold 5$3.66$0.44



    *Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

    Here is a chart of the company's share price showing over the past couple of years. Investors in the past couple of years have been caught between a piece of iron ore and a hard place.

    (click to enlarge)


    In summary, Atlas Iron is a business with some very well positioned assets and some more infrastructure and assets to be developed. The company's profitability is largely dependent on the iron ore price at any given point in time. The company does have experienced management and cash on hand at present.

    It appears that Atlas Iron will ride a see-saw with their fortunes linked inextricably to the iron ore price. If the company can get by over the next five years and build the required infrastructure to become a 46 Mtpa iron ore exporter without raising too much capital, they should be very well placed to have a bright future. The company has a lot of potential however a lot needs to go right for it. Investing with certainty in the Atlas Iron at the moment for the long term is a bit akin to jumping seven foot hurdles. You might succeed but the size of the obstacles increases the degree of difficulty.

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