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Atlas Iron impresses investors with quarterly report

Record shipments were enough for Atlas Iron (ASX: AGO) shares to be immediately pushed up when the market digested its quarterly report yesterday.

It was a strong quarter for Atlas which delivered a 16% increase in shipped iron ore when compared to the previous quarter, but perhaps it was the company’s 25% increase for FY 2013, which sent its share prices up 9%. The company’s flagship Wodgina mine was the driver for the companies increased production.

The average price for Standard Fines was US$107 per tonne and US$94 per tonne CFR received for Value Fines for the quarter. The company attributes the lower iron ore prices to the concerns of China’s tightening growth credit and level of steel inventories, which subsequently bounced back towards the end of June.

The impact of a softening dollar counteracted the sale price and the company realised over a 4% benefit from the falling AUD. The average price for Standard Fines for the financial year was US $109 per dry metric tonne.

The average cash operating costs were $49-$50 per tonne. At 30 June 2013, the company has $417 million in cash which increased to $461 million at 22 July 2013.

Outlook

A mine to port rail link is crucial for Atlas’ success. It will significantly lower costs for the miner and will enable it to remain competitive in coming years. Atlas is continuing to explore all options for access to existing and proposed rail infrastructure operations.

However, Altas has a number of mines forecasted to increase production to around 14 million tonnes by FY15-16. The company believes that once approved for a second stage of development, its Webber mine will contribute significant revenues to the over the overall company.

The company is targeting a rate of 12 million tonnes per year by the June 2014 quarter. Perhaps it is hoping the increased production will counter a drop in the iron ore prices.

Foolish takeaway

Even if Atlas can establish a rail link and find a JV partner for the second phase of its Mt Webber mine, the company still has to deal with a lower price tag on iron ore. Many predict a price of around $90 in coming years which could mean that less valuable products will sell for even less, further putting pressure on smaller producers. Atlas’ cash balance is good for shareholders and will enable it to pay a dividend of around 3%.

However, for a slightly bigger market capitalisation an investor can buy shares in Myer (ASX: MYR) or Metcash (ASX: MTS) and receive dividends of over 10% once franking credits are accounted for. In an industry with few sureties and a stock market with even less, this Fool isn’t taking the extra risk on board and believes the watchlist is the best place for the stock.

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Motley Fool contributor Owen Raszkiewicz owns shares in Myer and Metcash.

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