Australian analysts were surprised by Fortescue Metals Group Ltd.'s move to acquire 19.9% of Atlas Iron Ltd. but agreed that it is a smart play to keep low-grade iron ore competitor Mineral Resources Ltd. in check while effectively laying down "working capital" for growth options in lithium and base metals.
Former Fortescue CEO Neville Power said in September 2017 that the company was looking to diversify its business by investing in the energy and infrastructure sectors and expanding into gold and base metals exploration including copper and lithium, which analysts also see as a similar bulk-moving operation to iron ore.
Atlas, with its Pancho lithium project and Copper Range exploration project, fits in with this strategy, and while Patersons Securities senior resources analyst Simon Tonkin said lithium had "softened a bit" of late since revealing in February that his firm's Lithium Index had gained 69% in the prior 12 months, "longer-term it will be OK."
He told S&P Global Market Intelligence that recent corporate activity in the copper space showed companies tend to stick with what they are good at.
In the case of OZ Minerals Ltd. taking over Brazil-focused Avanco Resources Ltd., the target was at a similar stage of development to Atlas. Similarly, Sandfire Resources NL, which has the DeGrussa mine, acquiring Talisman Mining Ltd.'s share of the Springfield copper-gold joint venture in Western Australia gave Sandfire 100% access to the Monty deposit.
"It's a pretty astute move by Fortescue because they can't really lose on it," Tonkin said. "It's a bit like working capital. They put their foot on Mineral Resources, which is in a weaker position given Fortescue's balance sheet. I think it gives them a seat at the table to do whatever they want to do in whatever their strategy might be. They want to diversify, and maybe they want the lithium in Atlas."
Surprise move given low-grade ore market
Wood Mackenzie senior iron ore analyst Kim Christie told S&P Global Market Intelligence that Fortescue's move surprised her firm too, particularly as the iron ore giant has kept its motivations under wraps thus far.
"It's not something we were expecting to see. Lithium is in play, so it's difficult to know what the true motivations are, but in terms of what the market looks like overall, we expect any new [iron ore] developments will be towards the higher-grade end rather than lower-grade," she said.
"There's not huge amounts of incentive at the moment to expand low-grade supply of iron ore, but we expect the margins in the medium-term to narrow a bit between low and high grade ore, but not to go back to where it was two to three years ago, Christie said. "Atlas is only producing 9 [million tonnes] or 10 million tonnes through Mt Webber DSO, but for Mineral Resources, [its takeover attempt of Atlas] is to give them extra tonnes but also the greater economies of scale that come with that, and gives greater access to ports in the Pilbara."
She said the fact that Mt Webber only has five or six years of life left also suggests "there's more to it than just the iron ore tonnes," thus backing Tonkin's theory that it is more about the lithium opportunity.
As for total supply, Wood Mackenzie cannot see that changing in the short term, given Atlas had approved its Corunna Downs mine then put it on hold due to the low price of iron ore, and the company "probably hasn't got the balance sheet to support that at the moment."
"Whether there's any incentive [for Mineral Resources to develop Corunna Downs] at the moment is difficult to see," Christie said.
Port debate potentially looming
RM Capital head of research Rob Brierley said Fortescue's move was a "defensive mechanism to not allow Mineral Resources to get too big and become a sizable competitor" in the low-grade iron ore market.
Brierley told S&P Global Market Intelligence that while Atlas' 13 million-tonne port allocation at Utah Point was a "significant asset," it "doesn't make sense" for Fortescue to use that port as it is only good for Panamax-sized vessels, whereas the iron ore giant uses much bigger bulk carriers.
He said that while some of Atlas' "very large landholding" includes some low-grade resources, "it's still good for a few miscellaneous licenses and infrastructure" for Fortescue.
Atlas was also a founding member of North West Infrastructure, an alliance that includes Brockman Mining Ltd. and FerrAus Pty. Ltd. which in 2009 was conferred a 50 million-tonne-per-annum channel capacity allocation to facilitate the development of a stockyard and a two-berth facility in South West Creek within the Port Hedland inner harbor.
Utah Point and South West Creek are designed to facilitate junior miners' exports, so involvement by Fortescue may lure state government involvement, Brierley said.
