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China's tiny slowdown just killed Atlas Iron

Photo: Courtesy Mining Mayhem / Facebook

The crash in the iron ore price, driven by softening Chinese demand, has claimed its first major victim.

After entering into a trading halt on Tuesday, mid-tier Australian iron ore miner Atlas Iron will begin mothballing its Western Australian operations this month and cease exporting shortly after.

Atlas Managing Director Ken Brinsden said the decision to suspend production was taken after the company launched an extensive cost-cutting program, led by asset management firm Lazard, but was unable to find a way through the lower commodity price environment.

“To suspend our operations, with the impact that will have on so many committed and talented people, is an extremely difficult decision,” Brinsden said.

“I sincerely thank all those who have worked so hard to build Atlas’ production base and those who have worked furiously to maintain Atlas’ competitive position over the past 15 months, in the face of increasingly oppressive market conditions.”

Approximately 500 employees and contractors are currently employed across Atlas’ mines. There are a further 75 people in its Perth office.

All operations will be placed on care and maintenance in the hope the iron ore market conditions improve in the future.

The falling iron ore price has been a gathering problem for various parts of the Australian economy. Australia’s terms of trade have been falling dramatically, triggering revenue write-downs for the federal government, which has been struggling to claw back its budget deficit. And while Atlas isn’t a huge direct employer by any means, his comments point to the potential impact on employment levels if the margin pressures continue to squeeze major players.

Atlas’s margins have been crushed by the plunging iron ore price which has fallen about 60% over the past 12 months to lows of around $46 a tonne – well below the company’s breakeven price of around $60 a tonne. Back in January it confirmed it had been selling iron ore at a loss.

UBS analyst Glyn Lawcock told Business Insider this week Atlas was looking at a potential cash burn in the region of $200 million. As of December 31, Atlas was sitting on cash of around $170 million.

Atlas, of course, hasn’t been alone in confronting problems from this in the Australian resources sector. While Chinese authorities have been looking at ways foster demand for iron ore, those measures are starting to look like they won’t really help the Australian miners that are getting squeezed.

In a note to clients today on the outlook for iron ore stocks, investment advisers Wentworth Securities said: “Majors could drop capex expansion plans, however, the opposite is currently planned. China can launch new stimulatory measures which include major infrastructure. However, the indication thus far from the Chinese is to replace this sort of stimulus with stimulus that fosters sustainable internal demand.”

This chart, via Wentworth, shows the share prices of major miners alongside the iron ore price.

The company said the global supply-demand imbalance on the iron ore market has driven prices down to the point where it was no longer viable to continue production.

The world’s biggest mining companies, especially BHP and Rio Tinto, built huge amounts of future capacity through tens of billions of dollars in investment over the past 15 years. While there are many other factors at play, their huge supply generated in recent years as a result has played a part in destroying iron ore prices on the market.

The other driving factor is, of course, the slight slowdown in the growth of the Chinese economy. Chinese officials lowered the growth target from 7.5% to 7% earlier this year.

“Based on the significant percentage of global iron ore production which is now cash flow negative, Atlas expects prices will ultimately increase. However, the timing of a recovery is unclear, leaving Atlas with little choice but to take decisive action to protect its balance sheet and resource position,” Atlas said.

Atlas is now in discussions with its creditors concerning options which would enable the Company’s mines to re-start as efficiently as possible in a circumstance where an operating margin can be re-established, whether through further cost reduction where possible or improvements in the iron ore price.

Earlier this week ratings agency Moody’s downgraded the company to Caa3. Atlas confirmed it is under review for a further downgrade. S&P have also downgraded Atlas’ corporate family and senior secured ratings to CCC and placed all ratings on credit watch with negative implications.

Mining and crushing operations at the Atlas Mt Webber project will be halted next week. While its Abydos project is scheduled to cease within two weeks and operations at the Wodgina mine are expected to be completed in late April.

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