Nov 12 - Standard & Poor's Ratings Services today assigned its 'B+' issue rating to a
proposed US$325 million senior secured Term Loan B due 2017 to be issued by Australian miner
Atlas Iron Ltd.'s (Atlas Iron: B+/Stable) U.S. based special-purpose vehicle Atlas
America Finance Inc. At the same time, we assigned a recovery rating of '3' on
the proposed issue. The rating on the Term Loan B is subject to our review of
the final issuance documentation.
The recovery rating indicates our view of a "meaningful" (50%-70%) recovery
for creditors in the event of a payment default. We therefore equalize the
issue rating with our long-term corporate credit rating on Atlas Iron. The
proposed senior secured credit facility will be distributed into the U.S.
institutional term loan market and proceeds will be used for capital spending
and general corporate purposes.
The absence of existing debt ranking ahead of the senior secured Term Loan B,
our estimate of Atlas Iron's valuation in a default scenario, and Australia's
creditor-friendly insolvency regime support our recovery rating on the notes.
We value Atlas Iron on a going-concern basis because we believe that its cost
position in the 60th percentile and mining properties would mean it would most
likely be reorganized in the event of a default.
The senior secured Term Loan B is unconditionally and irrevocably guaranteed
by Atlas Iron and all subsidiaries that possess income-producing mining
assets. It is secured by a first lien on all of Atlas Iron's assets, the
largest of which are its Horizon I and Horizon II mining tenements. We note
the company will need to obtain consent from the Federal Minister for Minerals
and Energy, the Federal Minister for Lands, and from its joint-venture partner
in the Mount Webber mining tenement before the security can be perfected.
The 'B+' corporate credit rating on Atlas Iron reflects the company's high
mineral concentration, substantial capital spending requirements, ramp-up
risks, small size and reserve life, good cost position and "adequate"
liquidity, as our criteria define the term. The company has a "weak" business
risk profile. Atlas Iron's high mineral concentration to iron ore and high
operating leverage make its financial performance highly sensitive to volatile
iron ore prices and fluctuations in the Australian dollar foreign exchange
rate. Nevertheless, the company's good cost position in the 60th percentile of
the cost curve partly mitigates its mineral concentration.
We expect Atlas Iron's financial risk profile to remain "aggressive" over the
next 24 months. Atlas Iron's high capital spending requirements will keep its
free operating cash flows negative until fiscal 2015 (ending June 30) in our
base-case scenario. We expect the company to lower or defer capital spending
to maintain its liquidity position, if iron ore prices remain weak. But this
will likely affect the pace of production growth and could ultimately reduce
The outlook on the corporate credit rating is stable.
RELATED CRITERIA AND RESEARCH
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers'
Speculative-Grade Debt, Aug. 10, 2009
-- Key Credit Factors: Methodology And Assumptions On Risks In The Mining
Industry, June 23, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008