Junior iron ore miner Atlas Iron Limited (ASX: AGO) has barely started trading again on the ASX after a long break and the clock is already ticking.
It is a pretty ugly start too with the stock crashing 74.2% this morning to 3.1 cents following a near four-month suspension as it scrambled to sell shares and restructure its business to stay alive in the face of plunging iron ore prices.
But it's barely alive with iron ore falling 0.6% to $US51.42 a tonne with only the falling Australian dollar and forward contracts saving its bacon.
The miner has used pre-sales and hedging contracts to cover 70% of its September quarter production and will probably make a few dollars per tonne of ore sold if the Australian dollar doesn't head any higher from its current level of US72.7 cents.
The exchange rate has fallen a little over 7% since Atlas Iron published its new cost estimates and the miner benefits from a lower Aussie as it sells its product in US dollars and has most of its costs priced in Australian dollars.
Management said the miner would only make a profit if the price of the steel making commodity was above $US56 a tonne because of profit share arrangements with its contractors. This could essentially be brought down to $US52 a tonne, which is roughly how much Atlas Iron can sell most of its September quarter production for.
But the miner will not enjoy much protection from declines in the US dollar iron ore price as only 10% of its December production is protected.
Its hedging contracts do not extend beyond that period and this is why Atlas Iron needs a lower Australian dollar more than the rest of our economy to have any chance of bouncing back given that the iron ore price is expected to stay weak over the medium-term at least.
Atlas Iron isn't the only one feeling the pain of course with the likes of BC Iron Limited (ASX: BCI) and Fortescue Metals Group Limited (ASX: FMG) also struggling, although Atlas Iron is the best way to play the iron ore recovery theme given its marginally profitable position and scale – if that's your game.
Atlas Iron raised $86 million via a capital raising by selling shares at 5 cents a pop. Each new share sold comes with a free option that expires on June 30, 2017, for investors to buy another share for 7.5 cents. The option can be bought or sold on the ASX and trades under the code AGOO.
But buying Atlas Iron is more gambling than investing as its survival hinges on the commodity price and exchange rate.
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