* Atlas says China iron ore market still robust, shares rally
* Says boosting output as Chinese mills turn away from domestic ore
* Spot sales to reach 2.8 million tonnes in 2014 (adds details, quotes)
By James Regan
SYDNEY, Jan 29 (Reuters) - Atlas Iron Ltd, among the smallest of a group of miners expanding in Australia's Pilbara iron-ore belt, on Wednesday played down the risks of faltering demand fom China as a flood of new ore hits the market.
Analysts expect spot iron ore prices, which have been dropping since early December will continue to soften as demand from China, where Atlas sells all its ore slows in step with declining economic growth.
Smaller Australian producers such as Atlas and BC Iron Ltd typically spend more to mine each tonne of ore than giants, like BHP Billiton and Rio Tinto, which enjoy greater economies of scale.
As Atlas grows, its costs are coming down -- it forecasts it will spend A$49 ($42.99)- A$52 ($45.62) for each tonne this year. That is still $10 or more above the bigger producers, though a comfortable margin given current prices of around $124 a tonne .IO62-CNI=SI.
Atlas Managing Director Ken Brinsden said the Chinese market still had plenty of room to grow and any "falling out of bed" would be short-lived.
"The key driver is that the Chinese steel industry is overly reliant on high-cost domestic production and it is such a large chunk of their supply base that it is going to take quite a while for expanded production around the world, including Australia, to catch up and replace it," Brinsden said.
Iron ore prices are set to average $121.50 a tonne in 2014, lower than last year's $135, according to the median estimate in a Reuters poll of 14 analysts. That would be its cheapest price since 2009 when it averaged around $86.
Goldman Sachs holds one of the more bearish views on iron ore and forecasts prices to drop 20 percent to an average $108 a tonne in 2014.
Stocks of imported iron ore across China's major ports rose more than a million tonnes to 92.6 million tonnes last week SH-TOT-IRONINV, the highest since November 2012, according to industry consultancy Steelhome.
Australian miners are in the midst of multi-billion dollar expansion work to dig hundreds of millions more tonnes of ore in the next few years.
Fortescue Metals Group is expected to show on Thursday a 10 million-tonne rise in December quarter production to 29 million tonnes from a year ago. Earlier this month Rio Tinto and BHP Billiton posted increases of 7 percent and 16 percent respectively.
During the December quarter, Atlas reached a number of new supply agreements with durations of one to three years, with up to 7.9 million tonnes contracted for calendar 2014.
"The remaining tonnes will be held for spot sales," Brinsden said. Atlas said it will place up to 2.8 million tonnes of iron ore into the spot market this year.
Atlas in July approved a $146 million investment to dig its fifth mine, forecast to yield an initial 3 million tonnes a year of iron ore production.
Construction was now 50 percent complete and is integral if Atlas is to meet its target of 12 million tonnes of production.
Smaller miners also face bigger obstacles getting their ore to port across the Pilbara desert. Atlas is in discussions to access Fortescue's rail network and it has also been studying haulage partnerships with Aurizon Holdings and Brockman Mining to support additional expansions.
Project execution challenges will pressure the credit quality of Australian high-yield miners over the next 12-18 with Atlas facing more risk than Fortescue, according to Moody's Investor Services.
Atlas shares rose nearly 10 percent on Wednesday after raising its full-year iron ore production guidance and forecasting a 10-fold rise in first-half earnings before interest, tax, depreciation and amortisation to as much as A$203 million. The stock peaked at above A$4.30 in the middle of 2011 and has been on a largely downward trajectory since and is now worth around a A$1.
It raised its fiscal 2013/14 production guidance to between 10.2 million and 10.7 million tonnes, up from the previous forecast of 9.8 million to 10.3 million tonnes. ($1 = 1.1399 Australian dollars) (Editing by Ed Davies)