AGO 0.00% 4.5¢ atlas iron limited

FROM 2015 Annual Report The Group‟s Term Loan B facility has a...

  1. 71 Posts.
    FROM 2015 Annual Report

    The Group‟s Term Loan B facility has a total asset to secured debt covenant („asset to debt covenant‟) of 2:1, which is formally measured every six months on the release of the Group‟s half year and full year financial reports. The Group was in full compliance with the asset to debt covenant as at 30 June 2015. A breach of the covenant would result in the Term Loan B facility becoming immediately payable.

    The asset to debt covenant will vary according to the amount of the Group‟s total assets, the amount of the USD
    secured debt and the exchange rate used to convert the debt to Australian dollars. The amount of the Group‟s total
    assets is subject to, amongst other things, an on-going assessment of the recoverable amount of the Group‟s noncurrent asset values. Refer to Note 3 for further information regarding the value of the Group‟s non-current assets.

    The Company has positive net current assets as at 30 June 2015 of AU$5.8 million, which, if
    adjusted for the capital raising completed subsequent to year end increases to AU$74.1 million (after costs). (ie Equity Raising added 74.1 - 5.8 = $68.3m to Net Current Assets.)

    TOTAL ASSETS 30th June = $775.5m +Subsequent Net Capital Raise $68.3m = $843.8m

    NOTE 3: IMPAIRMENT LOSS

    Assumption CFR 62% Fe
    $USD/DMT AUD/USD
    Not later than one year 51 - 59 0.79 – 0.80
    Later than one year and not later than five years 57 - 77 0.80 – 0.86
    More than five years 75 - 81 0.81 – 0.82

    Sensitivity

    Horizon 1 mining properties
    The effect of a reasonably possible change as at 30 June 2015, in the following key assumptions, in isolation to each other, to the life-of-mine value in use calculations (net present value) of the Horizon 1 mining properties, are detailed below:

    Assumption Impact on Value Impairment
    in Use $’000 $’000

    $5 per tonne change in USD iron ore pricing 133,000 *-
    $10 per tonne change in USD iron ore pricing 281,000 **115,000
    $5 per tonne change in AUD operating costs 155,000 *-
    100 basis points change in discount rate 26,000 *-

    * No impairment of the carrying amount of the Horizon 1 mining properties due to headroom remaining in the carrying value.
    ** Impairment of the carrying amount of the Horizon 1 mining properties should the USD iron ore price decline by $10 per tonne.

    Horizon 2 projects
    As at 30 June 2015, the effect of a reasonably possible change in the following key assumption, in isolation, to the fair value less cost to sell calculations for the Horizon 2 projects are detailed below:


    Assumption Impact on Fair Value $’000 Impairment $’000
    10% change in implied valuations
    per reserve/resource tonne 14,000 *14,000


    * The recognition of this impairment assumes that the movement would fall outside of an acceptable range.

    TERM LOAN B FACILITY

    As at 30 June 2015, the outstanding balance was US$268,100,000.

    AT AUD/USD of 0.73 = $367.2m AUD.

    SO to stay within covenants AGO has to have total assets of $734.4m. After the capital raise they had $843.8m.

    However with where the Iron Ore price is (ie it has declined more than $10 USD) , the impairment losses on the value of the Horizon 1 and 2 alone would amount to $139m. $843.8 - $139m = $704.8m.

    Need to have assets of $734.4, have assets of $704.8m - Breach covenant, bye bye AGO.

    Also the above does not take into account likely further write downs in Inventories, PPE, exploration and evaluation assets etc due to the low Iron Ore price. The company would have to do an assessment of its carrying values anyway at 31 December due to the large discrepancy between market cap ($48m) and net assets ($288m)

    Finally, the Assumptions AGO has used for Cash flow are:

    Forecast iron ore price for the forecast period (to 31 August 2016) of between AU$67 and AU$77 per tonne (benchmark IODEX 62% Fe CFR China).

    At the moment the AU tonne price is $54.64 AUD per Tonne.

    A reduction to the Atlas adopted forecast price of US$10 (AU$13) per tonne (benchmark IODEX 62% Fe CFR China), would result in a net working capital position of approximately AU$30.0 million by August 2016, in the absence of further cost savings, sale of assets, additional equity or debt funding and assuming no change in underlying US$:AU$ exchange rate.

    So their net working capital would fall from $78.4 to $30m (ie Cash outflow of $48.4m) at the current price (further reducing Net Total Assets).

    So it appears its only a matter of time (days perhaps if Street talk is right and they're talking to their bankers) before AGO is forced to pull up stumps due to impending breach of covenants. I'm not sure what directors duties are, but one would think that if the breach was inevitable then they would have to announce that to the market and suspend trading? I'm not sure on that one.

    J.
 
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