Freight Rail

Aurizon delays Pilbara play

Aurizon Train

Major shareholder Perpetual has urged Aurizon to shelve its Pilbara railway plan, after the operator stalled the development due to the iron ore slump.

Aurizon holds an exclusive contract to develop a railway for the West Pilbara Iron Ore Project, after it joined forces with Chinese steelmaker Baosteel to acquire Aquila Resources in a $1.1 billion bid in 2014.

Together with mining partners POSCO and AMCI, the companies aim to develop a 40 million tonnes per annum iron ore mine, rail and export project, with Aurizon building and operating the 430km rail link between the mine and a new port facility at Anketell, 30km up the coast from Dampier.

But since the partners took over Aquila in 2014, the iron ore price has plummeted.

After averaging US$100.56 a tonne in May 2014, the iron ore price has dropped to roughly US$60 a tonne so far in May 2015.

Aurizon chief executive Lance Hockridge in February warned the viability of a Pilbara line would be “very challenging” if iron ore stayed at or below the US$60 a tonne mark.

A Fairfax report suggested Aurizon would push the Pilbara plan back to at least 2016.

On Tuesday, May 11, Aurizon formalised that push-back, announcing a number of revised development dates to the ASX.

The operator said all partners in the project “are mindful of the volatility in the iron ore market price since the completion of the takeover”. As a result, they are set to agree on an extension of Aurizon’s period of exclusivity to develop an infrastructure solution for the project to at least April 30, 2016.

“Final investment decisions on whether to proceed with the project by all participants are currently contemplated to occur in late CY2016,” the operator added.

Perpetual, which at 6.28% ownership is Aurizon’s largest individual shareholder, doesn’t think the delays are adequate to respond to the iron ore slump, however.

Instead, the fund manager wants Aurizon to shelve the project completely, and focus instead on delivering benefits to shareholders elsewhere in the business.

“Management should be focused on delivering on cost out opportunities in the operating business, improving free cash flow and distributing this to shareholders,” Perpetual Australian equities head Paul Skamvougeras was quoted as saying in multiple Fairfax outlets on May 11.

“Aurizon’s strong balance sheet gives the company flexibility to pursue genuine growth opportunities when they arise [but] the Western Pilbara Iron Ore Project is not one of them.”

When a delay to the Pilbara development was rumoured in April, the operator said it planned to work with its existing customers to improve productivity, and reduce costs.

“Our aim in improving supply chain efficiency is to create long-term mutual value and to assist our customers’ products to remain competitive in global markets,” an Aurizon spokesperson was quoted to have said.