That Atlas Iron could be in a net cash position within a few months is staggering.
It was only in April 2015 that the crashing iron ore price forced the debt-laden iron ore producer to temporarily suspend operations at its mines. Within a matter of weeks it struck a deal with its contractors that allowed it to restart production and then moved to raise equity in an attempt to give it a better buffer from the ongoing weakness in prices.
But its $US267 million Term Loan B debt due to mature in December 2017 continued to weigh on Atlas and forced it to conduct a highly dilutive debt restructure in 2016.
In exchange for an extension of the maturity and a near halving of the debt, the deal delivered the company's bondholders 70 per cent of its equity after the restructure, but has allowed Atlas to continue to export iron ore from its three Pilbara mines.
This turnaround initially did little to spark movement in Atlas' share price which, once worth almost $4 per share, had remained under 4¢ per share since a July 2015 raising, conducted at 5¢.
But at the end of October 2016 that began shifting. Atlas closed on Friday at 4.3¢ per share after hitting 5¢ per share during the day's trading, the highest price it has reached since the 2015 raising.
Most of it comes down to the gradual recovery in the iron ore price to about $US80 a tonne and the impact that price has on Atlas' profitability and restructured balance sheet.
Making cash
Atlas' first market announcement in 2017 reflected its newfound position well. The junior said its cash on hand increased by $39 million to $134 million during the December quarter.
Under the terms of the debt restructure, Atlas agreed to a cash sweep which funnels any cash over $80 million at the end of each quarter into debt repayments. This meant Atlas repaid $54 million of its Term Loan B debt during the quarter, pushing the pile that once threatened the company's survival down to $118 million and giving Atlas' interim managing director Daniel Harris the confidence to declare that the company would be in a net cash position by the middle of 2017.
Hartleys head of research Trent Barnett is even more optimistic, telling clients in December Atlas could be in a net cash position by March and that "the bonds could almost be all retired by September".
S&P; Global Ratings raised its rating on the company's secured debt to "B-" from "CCC" on Thursday on the basis its earnings and cash flows had "increased materially" during the first half of the year.
"In our view, the debt reduction improves the sustainability of Atlas Iron's capital structure, making it more resilient to volatile iron ore prices," S&P; credit analyst May Zhong said.
"We expect the company's performance to continue in the March 2017 quarter due to hedging contracts in place for some of that quarter's shipments."
A new mine
Ms Zhong said she expected the cash sweep to result in more debt being repaid this quarter, reducing the company's leverage to below 2x in 2017 from 3.3x in 2016.
"The sustainability of this leverage is heavily dependent on iron ore prices ... [and] could increase to about 5x if benchmark iron ore prices were $US45 per tonne," she said, adding S&P; had pegged Atlas' break-even cash cost (the point at which it is neither making nor losing cash) at about the $US40 a tonne. Other analysts have its break-even at closer to $US50 a tonne.
Atlas' business, still considered "vulnerable" by S&P;, continues to have two strong bear cases.
The first is the market insecurity about the iron ore price's strength, with a consensus of analyst forecasts from Bloomberg tipping the price to average $US55 a tonne in the second half of 2017.
The second is that Atlas needs to develop a new mine to maintain its production levels and keep a lid on its costs.
Atlas' Wodgina and Abydos mines are both due to stop producing before the end of the year, wiping about 9 million tonnes a year from the company's annual production and leaving it with just the 6 million tonne a year Mount Webber mine.
A new MD
After a positive definitive feasibility study on its replacement mine, Corunna Downs, in December Atlas is aiming to make a decision on its development this quarter, subject to securing "suitable funding".
For between $47 million and $53 million Atlas would develop the 4 million tonne a year operation, which it envisages running for between five and six years.
And that is where the challenges lies. Given that decision is made this quarter, Atlas is aiming for Corunna's first shipment to set sail in the March 2018 quarter by which point iron ore prices are forecast to have reverted back towards $US50 a tonne.
So there's every chance Atlas might be developing a new mine in a weak price environment. It's a tough welcoming gift for Atlas' new managing director Cliff Lawrenson, who starts Monday.
Shaw and Partners analyst Peter O'Connor said an argument could be made for Atlas forgoing the Corunna development and running the company for cash, which it would return to shareholders when Mount Webber's life ended in about seven years' time.
"That would be a really pragmatic and prudent thing to do," Mr O'Connor said. "Because it is likely Atlas will be the marginal producer once again and indebted again in a few years' time if the iron ore price gets back to below $US50 a tonne."
