Atlas Iron has decided lithium is a good market to be in and has got Pilbara Minerals on board in its bid to become more than just an iron ore producer.

The pair struck a deal under which Atlas (ASX:AGO) will buy between 1 million and 1.5 million tonnes of direct shipping ore (DSO) from Pilbara Minerals (ASX:PLS) over 15 months, starting in the June quarter of 2018.

The head of Pilbara Minerals, Ken Brinsden, was previously managing director of Atlas.

Investors liked the news, with Atlas shares closing up 10 per cent at 2.2c.

AGO shares over the past six months. Source: Investing.com
AGO shares over the past six months. Source: Investing.com

DSO requires only simple crushing before it is exported, making it lower cost. Atlas estimates it will make a tidy operating margin of between $15 and $20 per tonne after payments to Pilbara Minerals and its own costs.

Pilbara Minerals will mine the ore at its Pilgangoora project, 120km South East of Port Hedland in Western Australia’s Pilbara region.

Buy, crush and ship

Atlas will purchase the ore at the mine gate and crush it at its Mt Dove operation, 65 kilometres south of Port Hedland, before transporting it to Utah Point in Port Hedland for shipping.

“We expect to generate strong free cashflow for Atlas in return for minimum capital outlay,” boss Cliff Lawrenson said.

“It enables us to leverage our existing assets, including the crusher and port facilities, and utilise our corporate infrastructure.”

Iron ore through the floor

The move is part of Atlas’s strategy to diversify its revenue sources. Atlas came close to collapse a couple of years ago when iron ore prices tumbled below US$50 ($65.25) a tonne from the peak of nearly US$200 a tonne in 2011.

The iron ore price crash has seen Atlas’s share price fall massively from $4.34 in mid-2011 to the 2.2c it is trading at currently.

“This is the first revenue earning agreement we have reached as part of our diversification strategy and it will not be the last,” Mr Lawrenson told investors.

Atlas is now working to finalise export sales arrangements, including funding for prepayments to Pilbara Minerals.

Building on Atlas’s forecast lithium revenues, royalty payments from Altura Mining’s (ASX:AJM) Pilgangoora project are also expected to start in the June quarter of next year.

Atlas holds a 5 per cent gross sales royalty over the majority of the Pilgangoora project.