Will the collapse of Atlas Iron Limited cause McAleese Ltd's demise?

McAleese Ltd (ASX:MCS) shares have been suspended from trade, pending an update about the impact of Atlas Iron Limited's (ASX:AGO) decision to cease production.

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The outlook for McAleese Ltd (ASX: MCS) continues to darken after Deutsche Bank downgraded its recommendation on the stock to "hold" and slashed its price target by 71% to just 20 cents.

The investment bank's revised guidance on the transport contractor comes in the wake of the potential collapse of junior iron ore miner Atlas Iron Limited (ASX: AGO). Accounting for roughly half of its underlying earnings, Atlas Iron is a key customer for McAleese which carries iron ore from various Atlas Iron mines in the Pilbara to Port Hedland.

As a result of this unfortunate development, the company's shares have been suspended from trade to allow management to consider the operational and financial implications of the decision.

Until Atlas makes a definitive decision on its future however – whether that be to remain idle and hope for a recovery in iron ore prices, or to enter into administration or receivership – it will be very difficult for McAleese to determine the full extent of the announcement, leaving them and shareholders in limbo for now.

Where to now for McAleese?

McAleese has proven to be a disastrous investment since it floated its shares on the ASX in late 2013. While its opening price was $1.50 per share, it has since fallen almost 90% and is currently stuck at 16 cents.

Right now, McAleese's market capitalisation is just over $45 million, while its net debt is sitting above $175 million. While there is an enormous level of uncertainty regarding the future of Atlas Iron (particularly with iron ore prices tipped to fall below US$40 a tonne), McAleese is far too risky to justify a position in your portfolio.

Forget iron ore. Here's how you can play the Australian LNG revolution

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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