ANALYST: Atlas Iron faces a $200 million cash burn

Iron Ore mine. Photo: Shuttershock.

There are some tough decisions ahead for Altas Iron. The company went into a voluntary trading suspension on the ASX today, with the death spiral in iron ore prices putting its future under a cloud.

UBS Australia managing director and Head of Resources Research Glyn Lawcock told Business Insider the miner had been burning cash for some time. He estimates there is approximately a $16 difference between the miner’s break-even cost for every tonne sold, and the current iron ore price.

At the end of December, Atlas’ all-in cost per tonne was about $63. Since releasing its first half results in February, the iron ore price has fallen almost 25% to about $47 a tonne. Lawcock estimates, looking at the the company’s FY15 shipped guidance of 12.9 million tonnes and current ore prices, the company is looking at a potential cash burn in the region of $200 million.

As of December 31, Atlas had about $170 million in cash and more than $330 million in debt.

Atlas’ product is also a lower grade ore which Lawcock said didn’t make it “economic for takeover” in the current market because other players probably wouldn’t be keen to add the resource to their portfolios. He likened it to buying a block of land in the outskirts of Sydney – when you already own prime land in the city – in the hope it will be worth something in 50 years.

Any new players would likely be held to similar cost profiles so Lawcock ruled that option out too.

He said while Atlas has been working hard to get the cost down and should consider mothballing higher cost operations as well as negotiating road haulage costs – especially as transport providers take advantage of lower oil prices – so they both survive.

McAleese Group carts the miner’s ore to port from its Pilbara operations and today said it would “continue to work constructively” with Atlas “to achieve sustainable solutions for both parties”.

Atlas’ company review is expected to take two weeks. Atlas has already made significant cuts to its WA workforce.

“Atlas has already commenced discussions with a number of its stakeholders in relation to various initiatives intended to further reduce costs and preserve value,” the company said in a statement on Tuesday,” it said in a statement today.

Atlas announced a 23% half year drop in revenue to $450.8 million and a statutory loss of $1.086 billion on the back of asset write downs for the first half of the financial year. The underlying loss was $139 million compared to a $61 million profit in the same period the year before.

The share price has fallen by one third to 12 cents since the beginning of March.

As for royalty holidays which have been granted to a number of iron ore companies by the Western Australian government, Lawcock said while they don’t have to find it today, they will have to find it in the future, so it’s not a huge reprieve.

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