Australia | Aug 28 2012
– Atlas result below consensus
– Cost outlook worsening
– Weak iron ore prices an issue for funding expansion plans
– Buy ratings continue to dominate
By Chris Shaw
Consensus estimates for full year net profit for Atlas Iron ((AGO)) for FY12 stood around $121 million, so the result of $72 million released yesterday was well below expectations. There was little good news in the result, as revenues were lower than forecast and costs higher and the second half result was particularly weak.
The worsening cost outlook is unlikely to improve in FY13, as Atlas has guided to costs of $47-$52 per tonne for the coming year, the increase reflecting higher haulage and mining rates. This is up from FY12 costs of $44.20 per tonne, with the 2H12 average around $47 per tonne.
Factoring in revised cost assumptions, UBS suggests in a spot pricing scenario Atlas would be loss making in FY13. To account for updated guidance the broker has cut earnings forecasts by more than 40% in both FY13 and FY14, with others in the market matching the move and lowering earnings estimates.
Consensus earnings per share (EPS) forecasts for Atlas according to the FNArena database now stand at 14.2c for FY13 and 21.4c for FY14. Lower earnings forecasts mean price target revisions, the consensus target now $2.36, down from $2.64 prior to the result, with RBS Australia yet to update its forecasts.
On a more positive note, sales guidance for Atlas of 7.0-7.5 million tonnes for FY13 was affirmed, while Macquarie notes capacity is expected to increase from six million tonnes annually at present to 10 million tonnes per year by June next year and 12 million tonnes by the end of 2013 as the Horizon 1 expansion is completed.
Funding this expansion is something of a question, as Macquarie notes the capital budget currently stands at $580 million. As at the end of June the cash position of Atlas was $400 million, so operating cash flow would be needed to make up the difference.
Current iron ore prices suggest this will be difficult, as Macquarie estimates net operating cash flow for the coming year would be around $60 million based on an effective current spot price of US$100 per tonne. Assuming current spot iron ore prices persisted through FY13, Macquarie estimates Atlas would make a loss for the full year, while Deutsche Bank estimates under such a scenario Atlas will need around $180 million in funding for its production expansion.
Long-term the production growth outlook for Atlas remains attractive. As Credit Suisse notes, beyond planned output of 12 million tonnes per year by 2014 from Horizon 1, Horizon 2 offers the potential for output to eventually increase to 46 million tonnes annually thanks to port allocations at Port Hedland and south east Pilbara resources.
To fill this port allocation Deutsche suggests Atlas will need to rely on third party rail access and the economics of the McPhee Creek project. Deutsche estimates it could cost Atlas up to $2.7 billion to deliver on this allocated capacity.
This suggests higher iron ore prices going forward will be a great help to the expansion plans of Atlas, with BA Merrill Lynch seeing prices as trending higher through FY13. In the meantime, Credit Suisse suggests the uncertainty with respect to Horizon 2 is likely to continue until rail study results are released.
With near-term share price performance likely to be driven by iron ore prices, UBS has downgraded to a Sell rating on Atlas from Neutral. The downgrade reflects concerns expansion plans could use all of Atlas's available cash if iron ore prices remain at or below current levels.
Others in the market are more optimistic, as the FNArena database shows aside from UBS, Atlas is rated as Buy six times and Hold once. The latter comes from Deutsche and reflects the view the stock is fully valued at current levels.
Macquarie sums up the Buy argument, pointing out Atlas offers significant leverage to the iron ore price and an expected short-term rebound in this market. The other positive for Macquarie is significant flexibility with respect to shorter-term expansion plans. As well, JP Morgan sees Atlas as offering good value relative to peers at current levels.
Shares in Atlas today are weaker in a broadly flat overall market and as at 11.30am the stock was down 11c or more than 6% t $1.495. This compares to a range over the past year of $1.485 to $3.97. The current share price implies upside of more than 57% relative to the consensus price target in the FNArena database.
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