Why the Atlas Iron share price is soaring

The Atlas Iron Limited (ASX: AGO) share price has rocketed up 20% today to 1.2 cents after iron ore prices surged overnight.

The spot iron ore price rose 6.2% to burst through the US$50 per tonne mark and close at around US$51.52 a tonne. Since reaching a multi-year low of US$38.80 a tonne in December 2015, the commodity price has gained 35% and reaching its highest levels since August last year.

That is on the back of a number of factors.

Iron ore shipments from Port Hedland in Western Australia – the major port for BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) iron ore – fell 10% in January 2016, compared to December 2015. Brazil’s Vale also reported last week that it had shipped less in the 3 months to December 2015 than in the previous quarter.

Some sources also say that high-cost Chinese iron ore production is finally leaving the market, and that construction is expected to pick up, increasing demand for steel (and hence iron ore). Chinese mills have also started to ramp up production of steel following the February Lunar New Year holiday.

For embattled iron ore miner Atlas, the rising ore price might just save the miner from going bust. In the December quarter, Atlas reported that it had full cash costs of A$54 a tonne, but was only realising an average price of A$51 a tonne, putting the company behind the eight ball.

Atlas managed to get its bankers to retire US$132 million of debt in exchange for US$10 million in cash and issuing shares and options. However, that will see the company’s lenders hold 70% of the company’s shares and options on issue, heavily diluting existing shareholders. Atlas’s share price has plunged 99.7% since February 2011 (5 years ago).

What now for Atlas?

The key question remains – where will the iron ore price go? For where it goes, so too do the fortunes of Atlas and its shareholders. Higher grade, seaborne iron ore from the likes of Australia’s mines may well begin to replace higher-cost, lower grade Chinese ore, which could see prices stabilise.

Foolish takeaway

Atlas Iron is still a highly risky speculative investment, and there’s no guarantee the company will survive, particularly if iron ore prices crumble again and stay low. Investors might want to look elsewhere.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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