Atlas Iron shareholders: it's time to take a cold shower

It may have taken a lot longer than its poor old shareholders would have liked, but recently announced efforts by struggling iron ore miner, Atlas Iron Ltd (ASX: AGO) to address its production costs have delivered a lifeline to what would have otherwise been permanent closure. Thanks to a profit sharing deal with its contractors, Atlas Iron recently resumed production – after suspending operations in April – at a break-even price of $US50 a tonne – up from the previous break-even figure of $US60 tonne.

Atlas CEO David Flannigan has reassured shareholders the company could ride out iron ore prices as low as US$45 a tonne for a few months, and at current levels ($US62 a tonne) it's actually making some money.

The trouble is, the price of bulk commodities are by nature relatively volatile, and there's growing speculation that the iron ore price will drop below $US50 a tonne in the second half as growing competition among the world's biggest low-cost producers leads to a significant surplus. There's also talk of prices dropping into the US$30s during the fourth quarter as Rio Tinto completes an expansion project and the Roy Hill mine finally starts shipments.

Given the strong likelihood of a pending free fall in the price of iron ore, the willingness of investors to support Atlas Iron's $180 million capital raising to strengthen its balance sheet – which has a long-term funding gap of $440 million – beggars belief. Since early August 2011 when it was trading at over $4, Atlas Iron's share price has followed the fortunes of the iron ore price down to its current $0.12.

Figure 01. Atlas Iron's share price 2010 to 2015

Source: Rivkin, Saxo

Given that the forecast return of equity (ROE) is a net negative, and intrinsic value on the stock is virtually nil, attempts to revive Atlas Iron appear to have more to do with management egos than any attempt to act in the best interests of its most loyal supporters. Shareholders will see what little remaining value there is in the stock seriously diluted by the issuing of another 3.6 billion new Atlas Iron shares.

The company hopes to raise $50 million through a placement to new and existing shareholders, plus an additional $100 million through a shareholder participation offer, both at 5c.

It's time for true believers in the Atlas Iron story to take a cold shower. In the last 18 months, mines responsible for iron ore output equaling 240 million tonnes per annum have closed and are unlikely to reopen. By all accounts, Atlas Iron should be among them.

Investors' who like the speculative end of the share market will find infinitely better opportunities for their space cash. The performance of Atlas Iron's management and its board has been underwhelming, and everyone would have been better off had they sought a buyer, and returned what little money – if any – back to shareholders.