Shareholders in Atlas Iron Limited (ASX: AGO) would be gratefully eyeing the bounce in the iron ore price following the massive explosion at a key Chinese port yesterday.
The fireball at Tianjin port has disrupted imports of the steel making ingredient and pushed the ore price up 1.3% to $US57.02 a tonne with experts predicting that the accident will support the commodity price over the short term.
A firmer iron ore price is exactly what Atlas Iron needs to stay alive with its full year results casting fresh doubts about the sustainability of its business even as it reaffirmed that its new cash cost sits at $US50 a tonne.
While the miner shipped a record 12.2 million tonnes of ore in 2014-15, or 12% more than the previous year, it couldn't save Atlas Iron from posting a massive $1.38 billion statutory loss that is partially driven by huge writedowns in asset values and restructuring costs that are associated with the recapitalisation of the business to stave off bankruptcy.
But even if you ignored these one-off items, the miner would still suffer a $240 million net loss because of the halving in the iron ore price over the period.
The iron ore price isn't the only challenge facing Atlas Iron. Buried in the result is the miner's debt covenant which states the miner needs to have a total asset value that is at least twice that of its secured debt.
Atlas Iron has just managed to keep ahead of this ratio with total assets of $775.5 million and secured debt of $339.5 million. Breaking the covenant will allow those financing its $US268 million "Term Loan B" facility to recall the debt and send the miner to the wall.
What's interesting is that the falling Australian dollar is a double edge sword for Atlas Iron. A weaker Aussie against the greenback will drive its cash cost below the targeted $US50 a tonne mark, but it will drive up the value of its debt, and that could put its debt covenant under greater pressure.
The third key risk for Atlas is the health of its logistics contractor McAleese Ltd (ASX: MCS). Looking at McAleese's share price, which is sitting at a record low of 8 cents, the prognosis is not good.
If McAleese cannot fulfil its contract with Atlas Iron for any reason, it will likely jeopardise the operations of Atlas Iron. You can read more about this threat here.
Shares in Atlas Iron are trading 0.1 cent higher at 3.1 cents in late morning trade. There's no doubt a big upside to Atlas Iron's share price if the company can overcome its many challenges, but putting money into the stock is not investing – it's gambling.
