Atlas Iron Ltd . (ATLGF)

[AISI304]

Atlas Iron (ATLGF): Foster Stockbroking Talking Point Paper

www.fostock.com.au/LiteratureRetrieve.aspx?ID=236741

Monetising infrastructure with PLS DSO agreement

Event:

* DSO agreement with Pilbara Minerals (PLS); revised assumptions.

Analysis:

* DSO agreement reached with Pilbara Minerals (PLS): AGO will purchase
a minimum of 1Mt of 1.5% lithium DSO from Pilbara Minerals, and up to
1.5Mt over the next fifteen months.

* Monetising AGO’s existing infrastructure: AGO will purchase the ore at
PLS’ Pilgangorora mine gate, and crush the ore at Mt Dove, transport and
load to ship for export using its existing capacity at Utah Point.

* $30M EBITDA contribution from Lithium DSO opportunity: AGO expect
an operating margin of A$15-20/t lithium DSO. We have assumed 1.5Mt
of DSO from April 2018e, and a price of US$120/t for Li 1.5% DSO.

* Altura Mining (AJM) royalties to bolster cash flow in FY19e: 5% gross
sales royalty to AGO from AJM’s Pilgangoora production expected to
generate ~$5M cash per year from FY18e onwards. We estimate ~A$50M
value from the royalty stream.

* Delivering on growth options, preview of further deals to come: as
previously flagged, AGO was keen to monetise its existing infrastructure,
and in particular its crushing, transport, and port capacity. We are now
seeing the first fruits of that revenue diversification pivot. AGO continue
to work on deals for ~2.5Mtpa remaining Utah Point capacity.

* Additional cash likely to allow for continued headway into debt
reduction. Term Loan B was A$103M at 30 September, while cash was
A$114M. Proceeds from AJM royalty stream likely to be applied to debt.

* Growth options: the company continue to consider future iron ore
opportunities including bespoke low alumina iron ore product, Corunna
Downs development, DSO from Davidson Creek Hub and Miralga Creek,
and magnetite from the Ridley Project. Outside of iron ore, the company
has flagged further lithium (Pancho, Cisco JV) and gold opportunities.

Earnings and Valuation:

* We now forecast FY18e and FY19e EBITDA of $98M and $93M (previously
$108M and $78M).

* We have an unchanged valuation of $0.04 based on our DCF valuation.
The inclusion of lithium DSO, AJM royalties, and updated iron ore
forecasts was offset by updated currency forecasts and persistent iron ore
discounts. We view AGO as a leveraged opportunity for a constructive
view of underlying commodity prices, with increased revenue
diversification from lithium DSO and monetising existing infrastructure.

Recommendation:

* We maintain a Buy recommendation on AGO with an unchanged price
target of $0.04, in line with our DCF valuation. Revenue diversification
through mining services is a welcome addition to the portfolio. We see
positive catalysts for the stock include 1) further lithium DSO agreements;
2) updates on Corunna Downs development; 3) further debt reduction; 4)
development updates on further growth opportunities in iron ore and
other commodities.