THE more than $2.3 billion in asset writedowns flagged by Australia’s beleaguered iron ore miners in recent months could swell even further in the weeks ahead as the next earnings season nears.
Perth-based Atlas Iron on Tuesday became the latest iron ore miner to warn of a likely impairment, announcing a review of the value of its Horizon 1 and 2 growth projects was likely to result in a non-cash writedown of between $700 million and $900m.
Australia’s iron ore sector has been hit hard by a halving in iron ore prices over the past 12 months to its lowest level in five years amid a surge in supply and a cooling in demand growth in China.
Yesterday the price of iron ore delivered in Qingdao, China, was $US66.94 a tonne, the lowest since June 2009. The price is down 50 per cent this year. The plunge has squeezed the margins of Australia’s miners, wiping out the profitability of many and prompting a bloody sell-off of iron ore equities.
The Atlas impairment is the biggest, but far from the only, writedown from an iron ore miner in recent months.
Mount Gibson Iron earlier this month said it would write down a “significant” portion of the $631m carrying value of its Koolan Island mine off northern Western Australia.
Mount Gibson was forced to put Koolan Island on care and maintenance after a seawall collapsed, flooding the mine with seawater.
Gindalbie Metals reported a $640m impairment on its stake in the Karara magnetite mine, effectively writing down the value of its interest to zero, while fellow magnetite miner Grange Resources in September booked a $207.3m writedown on the value of its Savage River mine in Tasmania.
Grange’s accounts continued to ascribe Savage River a carrying value of $187m, which could again come under review in the coming months given the continued falls in iron ore prices.
Morgans senior analyst James Wilson told The Australian that more writedowns were likely in the upcoming earnings season.
“Given the drop in iron ore price it really wouldn’t surprise me if you saw non-cash writedowns from the other guys, including the majors,” Mr Wilson said.
“How much that might be, I have no idea. But given the drop off in iron ore prices it won’t be surprising if they did.”
Atlas’s impairment relates to assets acquired through a series of deals between 2009 and 2011. The biggest of those was its $828m takeover of Giralia Resources, which was expected at the time to create a miner worth around $2.5bn.
Atlas shares were trading at more than $3 each at the time of the Giralia deal and would eventually climb to a peak of $4.26 in 2011. The erosion of iron ore prices and concerns about Atlas’s ability to remain profitable has seen its share price collapse since then, with its shares trading at just 14c each on Christmas Eve.
Atlas shareholders have not been alone in their suffering. BC Iron shares have fallen from $5.28 at the start of the year to just 45.5c; Mount Gibson has gone from $1.035 to 24c and is below cash backing, while even industry heavyweight Fortescue Metals Group has gone from $5.93 to $2.54 over the year.
The squeezed margins and looming impairments will hit balance sheets hard during the coming earnings season, but Mr Wilson said he did not expect any of the established miners to be caught out by debt.
Most iron ore miners had progressively refinanced their debts on better terms in recent years, so the chances of the writedowns forcing the miners into dilutive and heavily discounted equity raisings would seem low.
When it announced its writedown plans on Tuesday, Atlas said it remained “well within” the terms of its debt financing package. “Most of the guys have good debt terms without too many nasties in there,” Mr Wilson said.
“Debt is actually available and on good terms, which is a rare positive at the minute.”
The dramatic plunge in iron ore prices has already sent a handful of the industry’s most marginal players into administration.
Iron ore miners Western Desert Resources, Pluton Resources, Sherwin Iron and Termite Resources have all gone under in recent months.
Atlas on Christmas Eve said it would take ownership of the 16 per cent stake in its recently commissioned Mount Webber iron ore mine currently owned by junior play Altura Mining.
Altura had owed Atlas about $22m in construction costs and interest, but will now hand over its stake instead.
Altura will retain a 1 per cent royalty on some sales from the project, payable only when the benchmark iron ore price is higher than $95 a tonne.
Source: The Australian Business Review