Aurizon bulks up for rail and ports expansion after One Rail deal closes – Michmutters

Aurizon bulks up for rail and ports expansion after One Rail deal closes

But he and senior executive Clay McDonald, who runs Aurizon’s bulk freight operations, will be in Adelaide on Monday to meet One Rail’s workforce. It’s the first chance the pair have had to brief staff on 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 start merging the bulk haulage operations.

Some investors were rattled when Aurizon announced the deal because the transaction will 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 in the crown of One Rail’s business for Aurizon is its operation of the 2,200-kilometre Tarcoola to Darwin Railway, which runs from South Australia to the Northern Territory directly into the Port of Darwin.

One Rail is the only freight haulage company that uses the rail link. Formerly known as Genesee & Wyoming Australia, it also hauls coal in both NSW and Queensland.

About one-third of Aurizon’s haulage revenues are derived from thermal coal, with the remainder split between metallurgical coal (used to make steel) and bulk freight.

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

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

Most of the 14 million tonnes in volume currently carried on the Tarcoola to Darwin rail link is high grade iron ore (mostly from magnetite.)

Aurizon believes the long distances between mines and ports in the region will favor rail transport because trains 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 give the company’s customers more transport options. (One Rail’s trains and terminals will be gradually rebranded under Aurizon’s name.)

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

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

Longer trains

The rail group plans to draw on its experience transporting commodities around regional Queensland to make the north-south rail link more efficient and potentially add longer trains, which already stretch for about 1800 metres.

If Aurizon’s strategy for One Rail’s bulk haulage business pays off, it is hopeful of making hundreds of millions of dollars from the bulk haulage market by 2030 and cutting revenues from hauling thermal coal to less than 20 per cent of overall haulage revenues by the same date .

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

The stock, which was trading at $3.82 per share at the start of July and $3.87 a year ago, closed on Friday at $4.02.

Still, uncertainty about Aurizon’s future earnings will linger until the company can provide there are potential buyers for One Rail’s coal business or it is spun off successfully (Aurizon is considering both options.)

Some of the nervousness over who would buy a coal-linked business in a world that is shifting to renewable energy has since eased due to the rebound in fossil fuel prices after Russia invaded Ukraine.

“Coal prices have rallied, inflation and funding costs have risen, the federal government has changed, and we think the market currently places greater value on assets with reliable, inflation-protected cash flows,” says UBS analyst Andre Fromyhr.

High quality metallurgical coal exported from Queensland has traded at record high prices this year. Prices have, however, weakened since the state revealed plans to take extra royalties when prices go above $175 per tonne.

Merlon Capital Partners is among the funds that remains overweight Aurizon’s stock, with the investment group’s most recently quarterly report showing that the rail group is still one of its top 10 holdings.

Merlon said last year that it believed Aurizon’s 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 it is floated Aurizon investors would receive stock in the new company.)

debt reduction

If Aurizon does sell the business, the cash will help to reduce some $3.6 billion in net debt from existing operations (plus an additional $1.9 billion in bank debt it is taking on to buy the One Rail business.) It could also use the cash to increase dividends.

When it reports its annual results on August 8, Aurizon is expected to deliver a dividend at the low end of its payout range, which is 70 to 100 per cent of underlying net profit after tax.

Macquarie analyst Ian Myles says Aurizon is likely to prefer a sale of the One Rail east coast haulage business because it would avoid the company incurring some $10 million of costs annually associated with being a listed entity and give it cash to make other bulk haulage acquisitions.

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

Aurizon has other challenges to tackle. Its rail operations in NSW were disrupted by flooding in early July and like other companies, it has been suffering from staff shortages due to people isolating with COVID-19.

It also needs to renegotiate enterprise bargaining agreements with unionized workforces (including more than 600 workers at One Rail) who are expected to push for higher pay increases to counter the rising cost of living.

Still, annual earnings from Aurizon’s core coal haulage business are expected to rise in the 12 months to June from cost-cutting, despite an expected drop in coal volumes.

Aurizon reaffirmed its full-year guidance of $1.42 billion to $1.5 billion in earnings before interest taxation depreciation and amortization in May. Most of the company’s rail haulage contracts include clauses that allow it to raise prices in line with inflation.

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