Pilbara iron ore producers to merge

Australian mining firm Mineral Resources has agreed to acquire Atlas Iron in a push to create a profitable 50mn t/yr mid-tier iron ore firm in the Pilbara region of Western Australia (WA) that is resilient to the current lower prices for low-grade iron ores.

Mineral Resources has agreed to provide Atlas shareholders with one of its shares for each 571 shares held, via a scheme of arrangement. The deal, which is recommended by Atlas' board of directors, is subject to regulatory approvals and will require 75pc of shareholders to approve it.

The combined firm will have initial capacity to produce 16mn-18mn t/yr of iron ore in Pilbara, with potential to expand production through the implementation of Mineral Resources' monorail infrastructure plans.

Both firms have struggled to maintain profitability as discounts for lower grade iron ores have widened over the past two years, making it difficult for their higher operating cost operations. Mineral Resources has the capital and wants to invest in infrastructure to bring down operating costs but needs the scale of operations offered by Atlas. Some high operating cost, low-grade mines, such as US firm Cleveland Cliff's Koolyanobbing mine, are being closed in WA, with expectations that others will follow suit if they cannot find ways to significantly cut costs. Mineral Resources hopes by investing in its own rail infrastructure it will be able to force down costs and become competitive with other Pilbara mining firms that own their own rail infrastructure, such as Australian producer Fortescue.

Atlas operates the 9mn t/yr Mt Webber iron ore mine and trucks ore around 200km to Port Hedland, where it has 15mn t/yr of allocation at the Utah Point export terminal. It also has the 4mn t/yr Corunna Downs and the 15mn t/yr McPhee Creek iron ore projects, both of which will benefit from rail access.

Mineral Resources operates the 7mn t/yr Iron Valley mine, which is 150km south of Mt Webber and around 300km from Port Hedland. Iron ore is also trucked from Iron Valley but rail access will drive down costs and could underpin an expansion at the mine to 16mn t/yr.

Mineral Resources wants to develop a 50mn t/yr iron ore railway and said that the acquisition of Atlas will help ensure that it is fully utilised.

UK-Australian mining firms BHP Billiton and Rio Tinto, as well as Australian producers Roy Hill and Fortescue, all operate their own railways in the Pilbara, allowing them to force down costs and maintain profitability despite weak prices. Atlas' higher cost base, which is largely down to trucking ore to Port Hedland, has left it vulnerable to lower prices and it was forced to temporarily close its operations in April 2015 while it restructured its business.

Atlas has also looked to diversify away from iron ore through investments in lithium and manganese.

Mineral Resources is in the process of closing its 4mn t/yr Carina iron ore operation in the Yilgarn region of WA, after the state government declined to approve its plans to expand the mine. Late last year it missed out on acquiring Australian gas independent AWE after Japan's Mitsui outbid it.

The 62pc Fe iron ore price has fallen to $63.60/t cfr China from $79.90/t at the end of February. The lower grade 58pc Fe ore has fallen to $50.50/t from $64.65/t over the same comparison.

The average price received by Atlas for its iron ore sales fell to $48.60/t cfr China in July-December from $49.80/t over the year-earlier period. Atlas' received price was driven down by a lower headline price and continued elevated discounts for lower grade product. Atlas' full cash costs were A$56.70/wet metric tonne (wmt) cfr China in the latest half from A$52.30/wmt a year earlier.