Australian iron-ore company Atlas Iron announced this month that forward sales arrangements are providing it with a measure of near-term protection against iron-ore price falls while retaining some exposure to price upside.
The first forward measure taken by Atlas is that it has purchased iron-ore put options. These provide a floor price, while allowing Atlas to retain full exposure to any price-rise through a floating-priced physical sales contract. This means that for the tonnes covered by the puts, the price received by Atlas cannot be less than that of the put price, even if the index price falls below the put level.
Atlas has 400 000 dry metric tonnes (dmt) of 62% iron (Fe) puts in place. This is equivalent to about 460 000 wet metric tonnes (wmt) of Atlas 57% Fe product.
These options, if exercised, will see Atlas realise prices of between $53/dmt to $54/dmt for 300 000 t in July, even if the price falls below these levels.
Atlas also stands to earn $54/dmt (62% Fe cost and freight (CFR) China) for a further 100 000 t in August, if prices fall below these levels. In circumstances where the market price is above these put option price levels, Atlas will receive this higher price.
Secondly, Atlas has about 900 000 wmt of forward sales in place at a fixed price. These fixed price sales contracts are based on an average sale price net to Atlas after adjusting for grade, discounts and lump premium of about $49/dmt CFR China for combined lump and fines product.
These forward sales comprise about 300 000 wmt of lump and 600 000 wmt of fines to be filled between July and October.
Under this arrangement, a floor and ceiling price is set at a 62% Fe equivalent level. This means Atlas is assured of realising no less than the floor price and no more than the ceiling in respect to the tonnes covered by the transactions. If the actual price is within this range at the time of settlement, the actual price is applied.
Atlas has about 1.1-million wmt worth of sales covered by this pricing methodology with physical delivery to occur from July to December. The floor prices on these transactions range from $50/dmt to $52/dmt (62% Fe CFR China) and the ceiling prices from $55/dmt to 60/dmt (62% Fe CFR China).
In May, Atlas made an announcement regarding its contractor collaboration arrangements in which it stated that the company had sought to establish strategies that mitigate Atlas’s exposure to iron-ore price volatility in the near term.
These strategies are aimed at providing Atlas with some insulation against falls in the US dollar iron-ore price, while maintaining some exposure to pricing upside. As Atlas’s forward sales relate to the US dollar iron-ore price, Atlas retains the benefit of the positive impact that a weakening Australian dollar has on the revenue from its US dollar denominated iron-ore sales.
Based on the transactions entered into by Atlas to date, about 2.06-million wmt of production for the September quarter and 400 000 wmt of production for the December quarter are currently subject to some form of price insulation.
This equates to roughly 70% of the September quarter’s targeted production of about three-million metric tonnes and about 10% of the December quarter’s targeted production.
Atlas MD David Flanagan said the pricing strategies sought to reduce Atlas’s exposure to iron-ore price volatility, while the company completed its capital raising and production ramp-up.