Bloomberg News

Atlas Iron Speculation Grows With Australia Port Needs: Real M&A

April 19, 2012

A loader truck receives a load of iron ore rock at Atlas Iron Ltd.'s Pardoo mine site in Pardoo, in the Pilbara, Western Australia, Photographer: Carla Gottgens/Bloomberg

A loader truck receives a load of iron ore rock at Atlas Iron Ltd.'s Pardoo mine site in Pardoo, in the Pilbara, Western Australia, Photographer: Carla Gottgens/Bloomberg

Atlas Iron Ltd. (AGO), already Australia’s fastest-growing iron-ore producer, is also offering potential acquirers space to load vessels at the world’s busiest port for shipping the mineral.

Atlas posted a 22-fold increase in sales over the past two fiscal years, the biggest surge of any Australian mining company with a market value of more than $1 billion, and projects its iron-ore output will rise more than sevenfold by 2017, according to data compiled by Bloomberg. The $2.7 billion company, which has no debt, trades at 11.9 times earnings, half the average for the Bloomberg World Mining Index, yesterday’s data showed.

While BHP Billiton Ltd. (BHP) needs to build a 4-kilometer (2.5 mile) jetty and dredge a 32-kilometer shipping lane to add capacity at Australia’s Port Hedland, the gateway to Asia from the ore-rich Pilbara region, Atlas already has room for an expansion that may allow it to boost shipments to 46 million metric tons from 6 million without having to build over water. That offers “significant strategic appeal,” said Troy Irvin of Argonaut Securities Pty, and Atlas could lure a bid from BHP or Fortescue Metals Group Ltd. (FMG) that’s as much as 26 percent above its current value, according to EL&C Baillieu Stockbroking Ltd.

“This year is a good year to buy Atlas,” said Trent Barnett, head of research at Hartleys Ltd., a Perth-based stockbroker and corporate advisor. “For a large, Pilbara- producing miner, Atlas’s attraction is probably all to do with ports. If you’re a new entrant into the region, you’d want everything they’ve got.”

Atlas shares today rose 1.7 percent to A$2.99 at the close in Sydney, the highest level in one month. The benchmark S&P/ASX 200 Index gained 0.3 percent.

Trucking Distance

Tony Walsh, the company secretary at Perth-based Atlas, declined to comment on a potential sale.

From a single employee and a market capitalization of less than A$10 million ($10.4 million) in 2004, Atlas expanded to 400 workers and a value of A$3 billion in seven years. With mines within trucking distance of Port Hedland, the company has remained debt free even after more than 20 acquisitions, the largest of which was last year’s purchase of neighboring iron- ore explorer Giralia Resources NL for $758 million in stock, data compiled by Bloomberg show.

The company is amassing resources and port space as it seeks to meet a production target of 46 million tons a year by 2017. With A$377 million in cash at the end of 2011, Atlas will post a second consecutive year of profit in the 12 months ending June 2012, according to analysts’ estimates compiled by Bloomberg. The company’s shares, first sold to the public in December 2004 for 20 cents, closed at A$2.94 each yesterday.

‘Transport Economics’

“Ports are very scarce,” said Irvin, a Perth-based analyst at Argonaut Securities. “Building a portfolio of infrastructure options is difficult and that’s what Atlas has done. It’s a game of transport economics.”

While Atlas estimates that it can rely on trucks alone to double annual output to 12 million tons by June 2013, the company is considering turning to rail transport to tap mines further south to reach 2017 production targets. Atlas Executive Chairman David Flanagan said in Beijing this week that he’s already seeking Chinese investors for projects including rail and port ventures.

Atlas may be easier and cheaper for a buyer to integrate before it makes those decisions, which could happen after this year, according to Hartleys’ Barnett.

“They could start to sign agreements with providers, which might be hard to get out of, and they’ll decide where the railway is going and maybe sign a contract,” he said.

100 Percent Utilized

Port Hedland, named after the captain of the ship that anchored at the mangrove inlet in 1863, is currently the only location from which BHP and Fortescue ship ore that is mined in Western Australia.

The port’s current ability to handle 220 million tons per year in exports is “pretty much 100 percent utilized,” and ongoing expansions may raise total capacity to almost 500 million tons per year in 2015, according to Steed Farrell, a spokesman for the port.

As miners scout for ways to meet Asian demand, Atlas’s harbor-front position at Port Hedland is the key to its appeal, said Argonaut’s Irvin.

“The value they’ve got sits in the infrastructure,” he said. “It offers some of the best leverage to the Chinese growth story.”

World iron ore imports are forecast to rise 40 percent to 1.5 billion metric tons by 2017, with China accounting for more than half of that eventual demand as crude steel production on the mainland surges, according to Australia’s Bureau of Resources and Energy Economics. Australia’s exports may rise to 779 million tons from 407 million tons in fiscal 2011, the agency forecast in a March 21 report.

Dry-Bulk Ships

As part of an $8.4 billion plan to increase iron ore exports, Fortescue is more than doubling its capacity at Port Hedland’s Herb Elliott Port from 55 million tons to 120 million. It’s adding train unloaders, shiploaders, and berths, where dry- bulk ships that carry ore to China can be loaded.

With available land around the narrow, L-shaped harbor limited, BHP plans a development estimated to cost A$14 billion to add as much as 240 million tons of capacity by creating a new outer harbor. The cost projection comes from a 2011 report by Western Australia’s Department of Mines and Petroleum.

The program is “pivotal” for long-term growth objectives, BHP said in a Feb. 2 statement. The first 100 million ton-per- year expansion will start construction in 2016. The first phase of the project calls for building a four-berth wharf as well as new land infrastructure. Constructed in four stages, the whole outer harbor will take eight years to build, according to the port authority.

Spare Capacity

An acquisition of Atlas would give a buyer an immediate 10 million tons of unused capacity, the biggest such space available at Port Hedland, according to Peter Arden, a resources analyst at Ord Minnett in Melbourne. He said Atlas could fetch A$4 a share in a takeover.

In addition, Atlas has the ability to boost its capacity to 46.5 million tons through the South West Creek project being developed in a joint venture with Brockman Resources Ltd. (BRM), at an estimated cost of A$2.5 billion, according to a Feb. 29 presentation to investors.

Like Fortescue’s new capacity, Atlas’s additions will be in the port’s inner harbor, a zone that’s closer to existing rail lines and which Adrian Prendergast, an analyst at EL&C Baillieu in Melbourne, describes as the “prime location” in the port. Compared to what BHP will spend on building the outer harbor, acquiring Atlas would be cheap, he said.

‘Quite Intensive’

“The amount of capital required to build that is quite intensive versus acquiring a smaller producer with a large allocation such as Atlas,” said Prendergast, who estimates the company could fetch A$3.70 a share from BHP or Fortescue in a takeover.

Antonios Papaspiropoulos, a spokesman for Melbourne-based BHP, declined to comment, as did Yvonne Ball at Perth-based Fortescue.

There’s still no guarantee Atlas’s board would entertain an offer, according to Prendergast. Flanagan, who was managing director until February, said in September he had rebuffed several approaches and Atlas wasn’t seeking a buyer. As Atlas shares fetched A$3.41 on Sept. 13, he described the company as a “A$30 stock” and said only a hostile offer could succeed.

“They said they are not up for sale, but if you look at some of their actions they’ve been more promotional than ever,” said Ord Minnett’s Arden. “They need funding and they need someone to build the railway. They’ll struggle on their own to do it.”

Relative Value

With the shares down 14 percent since then, Atlas traded at 11.9 times profit, Bloomberg data showed yesterday. That compared with the average of 24.5 times fetched by companies in the Bloomberg World Mining Index.

Fortescue, which has production and rail infrastructure in the Pilbara region, would be interested in Atlas primarily for its port access, while Anglo American Plc (AAL), Xstrata Plc or a Chinese bidder may also want to own Atlas for its mines, said Barnett at Hartleys. Glencore International Plc (GLEN)’s proposed takeover of Xstrata will create the world’s fourth-biggest miner when the transaction completes in the third quarter.

“Also making it more attractive is the fact that they don’t have their own rail system yet,” said Prendergast at EL&C Baillieu. “If you’re Fortescue and you’ve got your rail network, you wouldn’t really want to buy another player with another rail network.”

Fortescue, with $2.5 billion of cash on its balance sheet at the end of December, plans to increase total iron ore exports to 155 million tons by the middle of next year.

‘Shrinking Pool’

Anglo American, with about $11.7 billion in cash, is always looking for acquisitions, Chief Executive Officer Cynthia Carroll said in September. The London-based company declined to comment on Atlas in an e-mailed reply to questions. A spokeswoman for Xstrata (XTA), which said in 2010 it was seeking deals to build up its iron-ore business, also declined to comment.

Mining companies are looking for additional growth with commodity prices that are still “reasonably robust,” said David Radclyffe, an analyst at Nomura International Plc in London, who ranks Atlas at the top of his list of mid-sized iron ore targets.

“There’s an increasingly shrinking pool of independent iron ore assets around the world and one of the few places where there are assets left would be Australia,” he said.

To contact the reporters on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net


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