Atlas Iron was forced to sell its iron ore at close to a loss in the June quarter amid huge pressure on margins created by an explosion in supply from the Pilbara majors.
The iron ore junior is moving to slash production of its lowest grade ore by up to 85 per cent in financial 2015 but will continue an aggressive increase of its higher-quality ore production as it aims for a fresh record.
Atlas achieved an average price of $US74 a tonne, adjusted, for ore in the June quarter, against all-in cash costs of $US70 a tonne. It achieved $US103 for its ore in the March quarter.
The pain could continue, with analysts pointing out that June prices were achieved against an average benchmark price of about $US102.5 a tonne. The iron ore price is hovering around $US95 a tonne.
The earnings impact of the thin margins in the June quarter will be softened by stronger margins in the rest of the year.
Some analysts said Atlas could have posted an underlying loss in the quarter of $3 million to $15 million.
Despite the thin margins, Atlas took heart from achieving a discount of 10 per cent to the benchmark 62 per cent iron ore price, a better result than some of its Australian peers.
Traditionally, lower grade ores have fetched 87 per cent to 93 per cent of the benchmark iron ore price .
Atlas chief executive Ken Brinsden believes the miner can maintain its discount level and narrow it to as low as 6 per cent in the medium term.
He is confident demand from China remained strong, despite ''unprecedented'' volumes coming online in the past six months from Rio Tinto, BHP Billiton and Fortescue.
He said the production ''ramp-up'' was forcing high-cost players in China and seaborne suppliers to shut. It was feasible that 85 million tonnes a year of high-cost production could be stripped out of the market .
Atlas said on Thursday it would replace a huge chunk of its lowest grade ore with its higher grade product (about 56.5 per cent grade) in financial 2015. The vast bulk of Atlas’ production is already higher-grade product, but still comes up short of the 62 per cent benchmark grade.
''In light of changing demands in the iron ore market, Atlas plans to increase the higher-grade standard fines proportion of overall production to 12 million to 12.2 million tonnes,'' it said.
''Should market conditions improve for the [lower grade] value fines product, there is the potential for increased production opportunities.''
Atlas’ lowest grade ore, known as value fines, fetched just $US61.67 a tonne in the June quarter, compared to $US74.15 a tonne for its higher grade, or standard fines, after adjustments. Atlas said its overall headline price, before adjustments, was $US78 a tonne.
UBS analyst Glyn Lawcock said the average headline price implied an impurity discount of $US16 a tonne. ''Going forward we expect Atlas to receive its average impurity discount of $US7 a tonne, which could be at risk if current discounts persist.''
Atlas’ guidance for financial 2015 is 12.2 million to 12.8 million tonnes, an increase of up to 17 per cent on the 2013-14 financial year. Production of its lowest grade ore will be pared from 1.3 million tonnes last year to between 200,000 and 600,000 tonnes.
It is also aiming to reduce all-in cash costs to between $68 and $73 a tonne, from $76.80 a tonne in financial 2014.
On Monday, BHP marketing president Mike Henry told the Financial Review price discounts for lower-grade ores will remain. ''I think the dynamic of wider spreads than we’ve seen in times when the market was tighter is absolutely here to stay.''
Fortescue’s average price per tonne in the June quarter slipped to $US82 a tonne, a 20 per cent discount on the benchmark price, and much poorer than it has usually achieved.
For the 2014 financial year, Atlas is expecting EBITDA of $240 million to $260 million and a cash balance of $265 million.
