There are going to be many winners from the return of Atlas Iron Limited (ASX: AGO) as the mid-tier miner successfully staves-off death through a capital raising and restructure.
Its share will resume trading post the equity raising but existing shareholders shouldn't get too excited as Atlas is likely to be revived as a zombie.
I am borrowing the term from the global financial crisis days when bankrupt financial institutions that were not allowed to fail were called "zombie banks".
These banks were allowed to keep operating but were not in a position to generate any meaningful returns to shareholders for a long time.
Atlas Iron could find itself in a similar position if the experts are right about the iron ore price. The commodity is expected to fall sharply again in the second half of this calendar year back toward the $US50 a tonne level, if not below.
The problem for Atlas is that its new improved production cost is around that level too, and that forecast is already proving to be optimistic because it's based on an Australian dollar exchange rate of US78.5 cents.
The Aussie has jumped over US80 cents and that means even skinnier margins for the miner.
While it is encouraging to see Fortescue Metals Group Limited's (ASX: FMG) chairman Andrew Forrest put his hand up for the upcoming equity raising to help recapitalise Atlas, I think shareholders should think twice before tipping more capital into Atlas because this requires you to do two things well – guess where the iron ore price will bottom and how long will it stay there.
It's hard enough to get one right, let alone two.
Moreover, even if Atlas can keep afloat at $US50 a tonne the winners won't be shareholders as Atlas will not be making a return. The real winners are the other stakeholders like employees, the royalty collecting Western Australian government and Atlas' contractors.
The only way shareholders can get properly compensated for the high risk they carry is for the price of the steel making ingredient to stay above $US60 a tonne.
That seems unlikely given the expected iron ore glut that is tipped to persist for at least three years.
The reality though is that Fortescue is probably not in a much better position than Atlas if the iron ore price was to tumble over the next few months.
A potential upside is extra cost savings from both miners merging some of their operations as their mines are located close to each other in the Pilbara.
This isn't enough to offset the risks, in my opinion. Commodities hedge fund Ospraie Management thinks that the iron ore price will have to fall to $US40 a tonne before high cost producers are forced to shut and demand and supply are brought back to balance, according to a report on Bloomberg.
If you think about it, it is better for the ore price to crash to clear the decks as the current status quo will only breed zombies – miners that are tethering between life and death.
But thanks to Forrest's push to have a federal government inquiry into the sector, the pain will be more evenly shared with iron ore giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), even though the two can still generate strong returns on a $US50 a tonne iron ore price.
The government could impose curbs and other restrictions on BHP and Rio Tinto if it finds they acted in an irrational and predatory way, and this political risk is not priced into their stock prices.
The further the iron ore price falls, the greater the pressure for the federal government to have an inquiry.
But government intervention could encourage the "zombification" of the sector much in the same way Chinese government subsidies to its high cost producers are doing as this artificially supports the iron ore price and miners that should have already exited the market.
I don't think BHP or Rio Tinto will suffer any government restrictions and I believe the stocks represent good long-term value, but this risk is too great to ignore.
Welcome to zombie-land!
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