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Has Atlas lost its way?

Atlas Iron Limited (ASX: AGO) has dropped over 25% in one week, is it market jitters or something else?

Atlas Iron is an iron ore producer with most of its projects in the northeast Pilbara region. Focused primarily on a commodity which has been forecast at dropping heavily in coming years has exacerbated the share prices movement in the past three years. Since mid-2011, when it sat at $3.84, its share price has been falling unhealthily ever since.

On Wednesday, the company released its 3Q results and it hasn’t helped stabilise the shares. In a market where shareholders are pessimistic about news, they find themselves relying too heavily on results rather than being optimistic towards potential. If a company doesn’t live up to analyst expectations, it will be dumped.

Major highlights of the report consisted of commodity sales being lower than hoped, the 2013 production target in jeopardy and record shipments. The company said it shipped a record 1.86 million metric tons of iron ore in the three months to March 31 despite huge rainfall caused by cyclones affecting much of the Pilbara region. However, the weather did affect production and the company was forced to use existing steel making ingredients, which lifted the shipments but they were of a lower grade.

Shipments were up 6% for 3Q compared to 2Q and the company received an average price of $US120, up 20% from the previous quarter. Operating costs remained at $46 – $50/t. The company also holds a healthy cash flow of $404 million and a very small debt to equity ratio, one which is much healthier than competitor Fortescue Metals Group (ASX: FMG). Perhaps it’s a classic case of a good company not living up to analyst expectations.

Foolish takeaway

The market has dumped Atlas Iron consistently and the current and future prospects don’t look good, but when companies are down and out, it’s the best time to invest. Atlas’ good balance sheets and management strategy will see it produce consistent amounts of the commodity in the near future, but if prices stay down then this company could get even cheaper but could carry more risk.

In the near future, smaller mining companies can be expected to recede and, since the mining industry is a price taking industry, the bigger miners like BHP Billiton  (ASX: BHP) and Rio Tinto (ASX: RIO) will be able to afford sustained lower prices on commodities. This will adversely affect smaller, less flexible miners and mining related service companies as they are forced to lower output or set aside projects until they can become fully operational.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto Limited (ASX: RIO).

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