It may not be the iron ore price that puts Atlas Iron Limited (ASX: AGO) into the ground but its rescuer McAleese Ltd (ASX: MCS).
Shares in McAleese tanked 12.8% to a record low of 7.5 cents this morning after the transportation and logistics company warned that it may have to take a material writedown after one of its debtors went into voluntary administration.
The debtor, Trans Global Projects, owes McAleese around $7.3 million and an upcoming creditors meeting in mid-August will determine if McAleese will need to make a provision against the debt.
While the amount in question is not very significant given that McAleese posted a pre-tax profit of $68 million for the six months to end 2014, it could put McAleese under significant pressure for a number of reasons.
Firstly, McAleese has already taken a big $17 million hit from the collapse of heavy haulage company HHA Group. McAleese owns 50% of HHA.
Secondly, McAleese said on Wednesday that it anticipates impairment charges in excess of $100 million for 2014-15 due to challenging operating conditions.
McAleese has started talking to its financiers about its loan facility and the liquidation of Trans Global could put McAleese in breach of its debt covenants.
The company had a net debt to equity ratio of 62% at its first half result, but that will blow out significantly given the expected writedowns in asset values. The problem is compounded by analysts' predictions that its earnings will fall materially in 2014-15 and 2015-16.
Ironically, the debt-laden company has ridden to the rescue of junior iron ore miner and client Atlas Iron, which was facing collapse due to the steep slump in the price of the commodity.
But Atlas Iron's white knight may prove to be a bigger threat to its share price than the iron ore price because McAleese bought 280 million shares in Atlas Iron, or 10.51% of the miner, as part of the rescue effort to save the miner.
McAleese may be forced to divest assets to keep financiers onside and selling down shares in Atlas Iron surely cannot be ruled out.
If McAleese goes under, and I am not suggesting there is a strong chance of this outcome, Atlas Iron could find itself in a hole too deep to dig itself out of because McAleese had agreed to cut fees it charges Atlas Iron in exchange for a profit sharing arrangement.
This was essential to ensure Atlas Iron's production costs fell to around $US50 a tonne to keep it in business (iron ore is currently fetching $US55.64 a tonne), but I believe McAleese didn't have much of a choice as the collapse of Atlas Iron would have been too bitter a pill for it to swallow.
This means it will be difficult for Atlas Iron to find another logistics company willing to offer similar terms should McAleese cease operations. This is why the fate of Atlas Iron may be more closely tied to McAleese than most investors suspect.
Both companies are un-investable in my opinion and would only appeal to gamblers who are happy to roll the dice and pray for a favourable outcome.
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