Andrew ‘Twiggy’ Forrest and his 33% owned Fortescue Metals Group have ridden to the aid of iron ore tiddler (no, basket case) Atlas Iron to defend it from an interloper in the share of Mineral resources which has made an all share offer valuing Atlas at around 3.2 cents, or around $300 million.
Fortescue told the ASX late Thursday morning that has agreed to acquire 15.0% of the ordinary shares in Atlas Iron at a price of 4 cents a share and in addition, Fortescue has an economic interest through a cash settled swap relating to notional shares equivalent to approximately 4.9% of Atlas Iron’s ordinary shares.
"As a result, Fortescue has an aggregate physical and economic interest in 19.9% of Atlas Iron’s ordinary shares.
"Fortescue does not intend to support the proposed Scheme of Arrangement between Atlas Iron and Mineral Resources on its current terms, but reserves the right to do so.
“A substantial holder notice and further details of the swap will be lodged in due course,’ Fortescue said in its statement. Atlas shares rose more than 6% to 3.4 cents, then fell more than 12% to 2.8 cents after investors realised that there would not be a counter bid from Fortescue.
Fortescue shares dipped 1.2% to $4.75 as investors gave the play an early thumbs down.
The move supports a dissident group of Atlas shareholders who have rejected the Mineral Resources paper offer and up to Fortescue’s announcement yesterday, their opposition had got them nowhere.
Now, for the time being, they have the support from one of the iron ore majors (Atlas though has weak quality iron ore, like Fortescue which is spending nearly $2 billion on a new mind to raise the average grade of its blend to 60% from 58% Fe).
Atlas has 103 million tonnes or thereabouts of measured reserves and more than 1.14 billion of measured, indicated and inferred reserves and with an average iron oxide content of 56% (meaning it sells at a bigger discount to the 62% benchmark price than Fortescue does (and Fortescue’s discount has been growing as Chinese steel mills want more and more higher quality ore, not cheap, low grade material).
How Atlas and its low grade ore fits into Fortescue’s business plan is unclear – it doesn’t and this sharemarket read looks like a move to force Mineral Resources pay more for Atlas.
It does have a foot in the door in lithium with a processing deal with Pilbara Minerals to receive direct shipping lithium ore from Pilbara’s Pilgangoora mine from this month. It is also starting to ship manganese ore from its berth at Port hedland.
In an update in May, Atlas warned of impairments to asset values that could reach $100 million for the year to June 30.
"The Company last reviewed impairment at 31 December 2017. In its Half Year Financial Statements, the Company provided calculations showing that the carrying value of its assets is particularly sensitive to assumptions around production costs and realised iron ore price.
"Consistent with these calculations, adverse movements in ongoing discounts applied to the Company’s lower-grade iron ore coupled with elevated sea freight and fuel prices are increasing the likelihood of an impairment at 30 June 2018.
"The Company recorded an operating loss during the March 2018 Quarter. Atlas recorded an average sale price of A$59/wmt and full cash costs of A$62/wmt for the month of April 2018 on volume of 0.7m wmt.
"If these challenging market conditions persist, a non-cash impairment charge in a $75-100 million range is likely to be recorded in the Company’s FY2018 Financial Statements. Final impairment will not be known until the Company’s FY2018 Financial Statements are finalised and audited in August 2018.
“An impairment charge will not affect the Company’s cash flow or compliance with debt obligations,” directors said in the mid-May statement.
