The iron ore miner’s size and local status have led to an unusual testing of the market’s appetite for risk.
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The iron ore miner’s size and local status have led to an unusual testing of the market’s appetite for risk.
There is probably no better case study for the Western Australian economy than Atlas Iron, which has plummeted from share price highs above $4 in late 2011 to pitch a desperate capital raising at 5 cents per share.
The impact of the dramatic drop in the iron ore price has wiped billions from the Atlas market capitalisation. On the basis of its capital raising being successful and trading at 5 cents each, the market value of Atlas is less than several shell exploration companies that have undergone backdoor listings recently and emerged as technology businesses.
That is a shocking collapse.
But I am not writing this to criticise; Atlas was always at the top end of the cost curve and long predicted to be a goner if the price of iron ore dropped to $US70 per tonne.
The fact that the business has had a near-death experience and may yet claw itself back to some form of sustainable long-term success is nothing short of remarkable.
Anyone interested in business ought to register what Atlas has done:
• returned management to the founder;
• brought in its key contractors as shareholders under an extraordinary deal;
• cut costs to $50/t; and
• focused on extracting premium ore.
Of all these, clearly the most interesting is the deal with suppliers such as McAleese, Maca, Qube and BGC. These suppliers have not only cut costs, they’ve taken equity, recognising in some cases that the survival of their own businesses depends on Atlas and its impact on overall confidence in the market.
This deal also signals the advantage of having a strong mining cluster in WA where many people at operational, investor and advisory level understand the market and what is required in extraordinary circumstances. It comes from close relationships based on years of working with each other. It is hard to imagine such an incredible arrangement between suppliers and customers in most other industries, especially where there isn’t geographic reliance on each other as a hub such as this state creates.
Of course, there’s a size issue here too. Atlas is a small-but-important cog in the machinery of WA’s resources sector; it is not too big to fail from a wider economic point of view, but for suppliers it must look daunting if such medium-sized players are taken out of the market.
Clearly, the deal is not just about suppliers putting in equity. They have also slashed costs and come up with an arrangement whereby they share in the upside if iron ore increases.
Obviously these players have more riding on keeping Atlas alive than investors do. At this stage I am unsure of the degree to which shareholders and others in the market will subscribe to the Atlas survival story and believe that there is a future lucrative enough to put their money at risk.
I guess they will need to be assured that the worst is over and that iron ore bottomed out some weeks ago. While that is understandable, investors often have less incentive to throw good money after bad than suppliers who know how hard it is to extract what they owe from a liquidator.
The acid test is if the local investment community backs founder David Flanagan, who has been playing a major role behind the scenes before taking executive control recently.
Fundamentally, it might make sense for a business facing a catastrophe to return to the kind of management that got it started in the first place. Arguably the survival scenario has more in common with a startup, with different leadership required than in a more normal operational phase, boosted by tailwinds.
It will have been a big change for Mr Flanagan who, as the 2014 Western Australian of the Year and chancellor of Murdoch University, had a number of other things diverting his attention from Atlas last year.
Media connections
WHILE I think arguments about reducing media diversity are overstated in this day and age of the internet and the vast resources it brings, I do get intrigued when major publishers and broadcasters get together – either directly via ownership or indirectly through other arrangements.
Seven West Media is WA’s gorilla, owning a major commercial television station and the state’s biggest daily newspaper as well as a host of other assets.
Its only area of weakness is radio but even there it has a presence that, in a different way, enhances its power in other mediums.
For instance, I am seriously surprised how many journalists from The West Australian have regular gigs on ABC 720, a leading source of serious news on the airwaves.
Recently I have heard The West’s Canberra bureau chief Andrew Probyn start a new weekly slot. Doesn’t the ABC have its own political journalists in the federal capital? Mr Probyn joins colleagues from The West such as movie reviewer Mark Naglazas, personal finance expert Nick Bruining, and football journalist Mark Duffield as voices I hear regularly on the ABC.
There are a host of others from The West that appear to be embedded in the ABC from time to time.
It also goes the other way. The hilarious host of ABC 720’s Saturday morning gardening show, Sabrina Hahn, writes weekly for The West.
Where is the diversity of voices? In a state of 2 million people I find it hard to believe the pool of experts is so shallow.