Fortescue Stirs Atlas Iron Speculation

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Fortescue Metals has amassed a 19.9% stake in Atlas Iron and does not intend to support the current deal with Mineral Resources, unleashing speculation as to its true intentions.

-Hard to envisage why Fortescue would want low-grade iron ore
-Is it intending to keep tonnage out of the market?
-Could Fortescue use Atlas Iron as a launch pad for other minerals?
 

By Eva Brocklehurst

Fortescue Metals ((FMG)) has stirred the iron ore pot, amassing a 19.9% interest in Atlas Iron ((AGO)). Moreover, the company does not intend to support the proposed scheme of arrangement between Atlas Iron and Mineral Resources ((MIN)) on current terms.

Atlas Iron is predominantly an iron ore producer, with three operations in the north of the Pilbara. With the reserve grade for its current operations at around 57% iron the company has been a recipient of low-grade discounts.

Hence, theoretically, Fortescue Metals could be interested in the company's iron ore tenements, while Atlas Iron is impeded by the cost of trucking material to Utah Point, where it has port capacity around 13mtpa.

Credit Suisse finds it hard to imagine why Fortescue would want Utah Point as it is sufficiently accommodated at Port Hedland.

Also, given Fortescue has a strategy to create a new higher iron content blend, the broker  finds it difficult to envisage any great interest in Atlas Iron's low-grade material.Shaw and Partners likes the Atlas Iron port capacity and allocation and believes this is a handy resource for the right company.

It may enable Fortescue to expand at some future date, incrementally and cheaply. Meanwhile, Fortescue has strong infrastructure and adding some Atlas Iron tonnage would not be a surprise.

Mineral Resources Bid

However, Shaw and Partners suggests the stake has the potential to scuttle the Mineral Resources ((MIN)) tilt at Atlas Iron. The scheme of arrangement for Atlas Iron underway requires 75% of votes and 50% of shareholders to be in favour of the takeover by Mineral Resources.

Morgan Stanley suggests the acquisition of shares by Fortescue Metals may now mean the decision is contingent on how the 31,500 individual shareholders vote.

Fortescue has not provided any reason for the accrued stake but the broker contemplates whether it may be to keep tonnage out of the market. The acquisition of shares is a small amount, around $75m, to pay to potentially restrict existing and any future expansion-related, low-grade tonnage.

Neither Atlas Iron nor Fortescue have indicated whether Fortescue will bid for Atlas.

Alternative Metals

UBS suggests the interest in Atlas Iron could be the result of several factors. While the company has undeveloped resources and -$500m in tax losses, Fortescue's interest may rest with the North West Infrastructure project, a joint venture between Atlas Iron, Brockman Mining ((BCK)) and FerrAus (owned by Atlas Iron).

The JV plans to develop a port facility that has capacity to export 50mtpa from the South-West Creek at Port Hedland. Ownership in Atlas Iron would enable Fortescue Metals to have input into the development and potentially increase its B class tonnage.

UBS suggests this combination could be a win for all parties involved, as Fortescue Metals could increase its tonnage, and the JV partners would be able to use existing infrastructure to access the port instead of developing rail and port infrastructure.

However, Credit Suisse has some other ideas. Atlas Iron has other development opportunities such as Corunna Downs and is also active in the lithium arena.

Atlas Iron has an exploration and DSO offtake deal with Pilbara Minerals ((PLS)) at Pilgangoora. The company holds to prospective tenements in zones of known lithium-tantalum deposits.

The first prospect, Cisco, which Atlas Iron sold down its 51% stake to Pilbara Minerals in 2017, has been noted to host mapped pegmatites alongside tantalum. The other prospect, Pancho, has been confirmed to contain lithium-caesium-tantalum pegmatites. The company is also involved in manganese.

Fortescue Metals has recently told the market it is interested in lithium and base metals. Credit Suisse points out the economics of Atlas Iron's existing iron ore operations are not compelling and discounting for low-grade ores makes the market challenging for producers.

Hence, this situation could imply that Fortescue Metals has set its sights on the potential lithium package. If such is the case, Credit Suisse interprets Fortescue's move as a far more pronounced and proactive step towards diversifying away from iron ore.

Shaw and Partners agrees there could be an opportunity for Fortescue in the lithium portfolio. The broker, not one of the eight monitored daily on the FNArena database has a Buy rating and $6.40 target for Fortescue.

FNArena's database shows six Buy ratings and one Sell (Citi). The consensus target is $5.51, signalling 17.8% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 5.3% and 5.5% respectively.

See also Could Eliwana Reduce Fortescue's Discount? on June 4 2018.

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