Atlas Iron to halt production as it cannot shrug off China decline

Atlas Iron, Australia's fifth biggest iron ore producer, is to mothball operations and cease exports after falling iron ore prices driven by China's economic slowdown have made production perilously unprofitable for higher-cost companies.

Atlas, which has seen its share price fall to A$0.12 - a fraction of what it was in 2011 - admitted in a statement to shareholders that its break-even rate for mining iron ore was "well above" the price of iron ore on the spot market.

Benchmark iron ore for delivery to China has fallen below $50 per tonne this month compared with prices around $140 per tonne at the start of 2014.

While disappointing for the company and its shareholders, the decision will be seen as a positive by investors in the world's major iron ore miners, such as Vale, Rio Tinto, BHP Billiton and Fortescue Metals. They have long argued that the price plunge will benefit them as less efficient producers are forced to bow out. Rio and BHP both report producing iron ore in Australia at less than $20 a tonne.

Indebted Atlas is to suspend production at all three of its projects by late April following discussions with the company's lenders. Atlas employs about 500 people in production, and a further 75 office staff.

S&P has cut its rating on Atlas Iron to CCC, which means it considers the business vulnerable and dependent on favourable conditions to meet its financial commitments. The group's credit rating with Moody's has been downgraded to Caa3.

Managing director Ken Brinsden said the company's decision to mothball its mines was "extremely difficult". The company said "the timing of a recovery" in iron ore prices was unclear", leaving Atlas with "little choice but to take decisive action to protect its balance sheet and resource position".

While Atlas's decision to shutter its operations could be seen as a benefit to its larger rivals, it will also heighten fears that the resource-dependent Australian economy is vulnerable. The country has been coping with the end of a commodities investment boom that peaked in 2010-2011, when China's growth was in the double digits.

The Australian central bank has cut interest rates to a record low of 2.25 per cent to try to spur household spending that could replace some of miners' reduced economic activity. Retail sales in the country grew 0.7 per cent in February from the previous month.

Paul Dales, analyst at Capital Economics, said this apparent fillip was largely due to lower oil prices, explaining that "households have probably used the money they have saved at the petrol pump".

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