Aurizon gets bigger for rail and port expansion

But he and senior executive Clay McDonald, who runs Aurizon’s mass transit operations, will be in Adelaide on Monday to meet with the One Rail workforce. This is the first time the couple has had to tell staff about the plans since the deal was announced in October.

Nine months after the rail group announced its plans to buy One Rail from Macquarie Asset Management and the Netherlands’ PGGM Infrastructure Fund, it can finally begin to incorporate mass haul operations.

Some investors were confused when Aurizon announced the deal because the transaction would initially increase the company’s exposure to thermal coal (which is used to make electricity and is also the most polluting type of coal).

Jewel in the crown

But the jewel at the pinnacle of One Rail’s business for Aurizon is the operation of the 2,200-kilometer Tarcoola to Darwin Railway, which runs from South Australia to the Northern Territory straight to Darwin Harbour.

One Rail is the only freight company that uses rail lines. Previously known as Genesee & Wyoming Australia, also transports coal in NSW and Queensland.

About a third of Aurizon’s haulage revenue comes from thermal coal, with the remainder divided between metallurgical coal (used to make steel) and mass transit.

However, the location of the Tarcoola Railroad to Darwin makes it a potential transport link for more than 250 mining projects in the SA and NT producing non-coal commodities that are expected to remain in demand, according to Aurizon.

These include copper (used in batteries), zinc, phosphates (used in fertilizers), iron ore, lithium, nickel and rare earths.

Most of the 14 million tonnes of volume currently transported on the Tarcoola to Darwin railway is high grade iron ore (mostly magnetite.)

Aurizon believes the long distances between mines and ports in the region will support rail transport as rail can move large quantities of goods and have lower carbon emissions than trucks.

Adding operations in SA and NT to Aurizon’s existing businesses in Queensland, NSW and Western Australia will also provide enterprise customers with more transportation options. (One Rail trains and terminals will be gradually rebranded as Aurizon.)

Aurizon wants to be able to meet all of its customers’ needs, including providing trucking and port handling services after goods are unloaded from their trains.

It already provides handling services at the ports of Townsville in Queensland and Newcastle in NSW, and finds the port of Darwin particularly attractive due to its proximity to Asia. Operating a direct rail line to the northern port will allow Aurizon to give its customers more export options.

Longer train

The rail group plans to leverage its experience transporting commodities around regional Queensland to make the north-south rail line more efficient and potentially add longer trains, which already span around 1800 metres.

If Aurizon’s strategy for One Rail’s bulk hauling business bears fruit, it is expected to generate hundreds of millions of dollars from the mass hauling market by 2030 and cut revenue from hauling thermal coal to less than 20 percent of overall haulage revenue by the same date. .

Securing the Australian Competition and Consumer Commission approval in mid-July to proceed with the acquisition and divestment of One Rail’s eastern coal business has boosted Aurizon’s stake.

The stock, which was trading at $3.82 a share in early July and $3.87 a year ago, closed Friday at $4.02.

However, uncertainty over Aurizon’s future earnings will remain until the company can prove that there is a potential buyer for the One Rail coal business or a successful split (Aurizon is considering both options.)

Some of the jitters about who will buy coal-related businesses in the world turning to renewables has eased due to the rebound in fossil fuel prices after Russia invaded Ukraine.

“Coal prices have gone up, inflation and financing costs have increased, the federal government has changed, and we think the market is currently placing greater value on assets with reliable cash flows that are protected against inflation,” said UBS analyst Andre Fromyhr.

High quality metallurgical coal exported from Queensland has been trading at the highest prices this year. However, prices have weakened since the state revealed plans to take additional royalties when prices rise above $175 per tonne.

Merlon Capital Partners is one of the funds that continues to weigh on Aurizon shares, with the investment group’s latest quarterly report showing that the rail group is still one of its top 10 holdings.

Merlon said last year that they believed Aurizon stock was cheap.

Mr Fromyhr argues that Aurizon will benefit from the cash generated by One Rail’s east coast haulage business, potentially in the form of dividends, until it is sold or de-merged (if floating Aurizon investors will receive a stake in the new company.)

Debt reduction

If Aurizon did sell the business, the cash would help reduce about $3.6 billion in net debt from existing operations (plus the additional $1.9 billion in bank debt used to buy the One Rail business.) dividend.

When it reports its annual results on August 8, Aurizon is expected to pay dividends in the lowest payout range, which is 70 to 100 percent of principal net profit after tax.

Macquarie analyst Ian Myles said Aurizon would likely prefer the sale of One Rail’s east coast haulage business because it would avoid the company incurring the roughly $10 million a year in costs associated with becoming a registered entity and giving it cash to make another bulk carrier acquisition.

Potential targets identified by Macquarie include logistics group Linx Cargo Care, which is currently owned by Brookfield Infrastructure.

Aurizon has other challenges to overcome. Its rail operations in NSW were disrupted by flooding in early July and like other companies, it is experiencing a staff shortage due to people being isolated with COVID-19.

He also needs to renegotiate the company’s bargaining agreements with unions (including the more than 600 workers on One Rail) that are expected to push for higher pay increases to counter rising costs of living.

However, annual revenue from Aurizon’s core coal hauling business is expected to increase in the 12 months to June from cost cutting, although coal volumes are expected to fall.

Aurizon reaffirmed its full-year guidance of $1.42 billion to $1.5 billion in earnings before depreciation and interest tax amortization in May. Most of the company’s rail carriage contracts include a clause that allows it to increase prices according to inflation.

#Aurizon #bigger #rail #port #expansion