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Is Atlas Iron (AGO) a takeover target?


Why build when you can buy?

 

created by John Cahill - Fusion Partners Wealth Management

01 June 2012

 

Sometimes it is difficult to value miners...you have to consider commodity prices, foreign exchange rates, capex, labour costs, resource grade, extraction costs, depth of resource, concentration of resource, transport to port options, port allocation, and that is before you even start to consider the commodity super cycle or whether China will have a hard landing, a soft landing...or no landing at all.

However, there is a opportunity to 'ignore the noise' with Atlas Iron (AGO) and use cost comparisons to BHP's proposed Port Hedland Outer Harbour Development, to not value AGO, but determine if the current share price reflects 'value'.

My over-simplistic method completely ignores the majority of its assets, but it raises the point - is AGO now a takeover target based on its port allocation alone?

 

Analysis

Atlas currently has port allocation of (up to) 46.5 Mt at Port Hedland comprising :

- Up to 15 Mtpa capacity at Utah Point.
- Additional allocation up to 31.5 Mtpa through the proposed South West Creek Port (NWI)

The image below shows these port allocations from an Atlas Presentation at the BAML Conference on 17 May 2012. Click here to open the full presentation.

Click on the image below to get a larger image.

 

Port Hedland Inner Harbour Capacities

 

 

Now let's do some sums...

Atlas Iron's current market capitalisation is approx $1.927 Billion @ $2.17 per share

Now assuming a $4billion takeover price which is a massive 100%+ takeover premium

the cost to buy AGO's port capacity of 46.5 Mt is approx $86 million per Mt ( $4B/46.5 = $86M)

 

Now let's move focus to BHP's Proposed Port Hedland Outer Harbour Development.

The BHP Billiton produced 'Executive Summary' of the Proposed Port Hedland Outer Harbour Development is found at :

http://www.bhpbilliton.com/home/aboutus/regulatory/Documents/perExecutiveSummary.pdf

 

The increased export capacity is estimated to be 220 to 240 Mt based on 8 berths and 4 shiploaders.

The cost is estimated to be approx $20 billion, built in four stages (2-3 years per stage)

So assuming the project does not incur cost overuns :

the cost per Mt to build the new capacity is approx $84 million per Mt ($20B/240 = $83.3M)

 

 

There are a number of additional things to consider...

 

- BHP may not complete all 4 of the stages...and if so the cost per MT would be even higher as there would be more 'fixed costs' attributable to the whole project which would be borne regardless of whether 2 or 4 stages were completed

- the AGO valuation assumes a 100%+ takeover premium...which is probably overstated, but allows a direct comparison between the AGO and proposed BHP development in terms of cost per Mt.

- it is well known that various international miners are keen to gain exposure to iron ore in the Pilbara, including Teck and MMK (a further analysis of AGO 'value' could be conducted with comparison to the 'dead in the water' Flinders Mines (FMS) bid, which has no port capacity at Port Hedland)

- The outer harbour would avoid the congestion issues in the inner harbour and would allow for faster loading so would be considered superior...however i would assume there would be higher maintenance and ongoing costs attributable to the outer harbour prroject.

- AGO will possibly have to 'use it or lose it' with regards to their port allocations.

- AGO, although 'the fourth force in iron ore', is a relative minnow with an australian share market capitalisation of under $2b. In comparison FMG has an Australian share market capitalisation of approx $14b at a share price of $2.50, RIO has an Australian share market capitalisation of approx $25b at a share price of $57 and BHP has an Australian share market capitalisation of approx $102b at a share price of $32.

- although debt free, Atlas has significant capital expenditure to bring its mines to full production and to fully utilise its port allocation. It is unlikely Atlas will be able to do this on its own and a joint venture, takeover or other arrangement is likely.

- my analysis is extremely simplistic in that it ignores debt, options, dual listings and other factors which may affect overall capitalisation and purchase price.

 

Further Information

- Video from ABC's 'The Business'

- Article from 'The Australian'

- Article in Bloomberg

 

 

Disclaimer

This article has been prepared for clients of Fusion Partners Central Coast (FPCC) ABN 37 113 405 218 and others on request.

The article is based upon generally available information and is not intended to be, or to replace specialist advice in the areas covered but rather, the article is intended to be informative and educational only.

Although the information is derived from sources considered and believed to be reliable and accurate, FPCC, its employees, consultants, advisers and officers to the maximum extent permitted by the law disclaim all liability and responsibility for any opinion expressed or for any error or omission that may have occurred in this document.

This article may contain general advice which is defined in the Corporations Act to mean that we have not taken into account any of your personal circumstances, needs or objectives. It is therefore imperative that you determine, before you proceed with any investment or enter into any transactions, whether the investment or transaction is suitable for you in consideration of your objectives, financial situation or needs and you must therefore, before acting on any information included in this article, consider the appropriateness of the information having regard to your personal situation. FPCC recommends that you obtain financial and tax or accounting advice based on your personal situation before making an investment decision.

All investments should be made with consideration of risk after reading the FSG and PDS of the product provider, and after obtaining professional advice from a financial planner.

This article was created by John Cahill, based on legislation in place at the time.  Legislative changes may mean that this information is no longer current.  You should speak to your financial adviser.