Freight Rail, Mark Carter

Changing fortunes for Genesee & Wyoming

COMMENT: Last week’s announcement that Genesee & Wyoming Australia (GWA) has agreed to purchase Glencore’s Hunter Valley rail business will no doubt shake things up in the Hunter, but more importantly has the potential to turn around the fortunes of GWA, which has been down on its luck of late, Mark Carter writes.

Glencore announced the potential sale of its coal rail haulage business, Glencore Rail (GRail) in March this year with a deal anticipated to have been reached by September, though things did take a week or two longer.

For $1.14 billion, GWA has picked up 30 relatively new locos, close to 900 coal hoppers and long term contracts with Glencore Coal to carry at least 40 million tonnes of coal a year.

The announcement appears to have wrong-footed the Australian Competition and Consumer Council (ACCC) a little, which only two weeks before had announced an extension until mid-December on its deliberations on the two other competing bids for the GRail assets from Pacific National and Aurizon.

Despite being Australia’s third largest freight operator, GWA’s reach in the Hunter and around Australia will not be sufficient to raise the ACCC’s concern in regard to this acquisition.

It’s an interesting twist in the fortunes of GWA which next month celebrates its 19th anniversary in Australia. Four years ago I wrote an article highlighting the importance of its Australian subsidiary to the bottom line of US-based parent Genesee & Wyoming Inc (GWI).

In 2011 GWA’s accounted for just under 33% of GWI’s global revenues, though this was about to be diluted to around 20% as GWI acquired the US regional business of Rail America boosting annual revenues by 70% at the time.

On the back of its purchase of the Tarcoola to Darwin railway business and burgeoning iron ore revenues hauled for Arrium at Whyalla, GWA still remained GWI’s single largest division both by size and revenue, and its ratio of total revenues was set rise again with the imminent commencement of the 3.5mtpa Southern Iron ore haulage contract.

Back then with the Australian dollar at better than parity with its US counterpart, and GWA anticipated revenues exceeding $US 300m in 2012, it was the parent company’s jewel in the crown.

But then largely through no fault of its own, GWAs’ fortunes took a turn for the worse with the collapse in the global price for iron ore and other minerals. The Southern Iron contract died less than 18 months of start-up and other minerals traffics adjacent to the Tarcoola to Darwin line dried up as mines closed.

Even though the dollar to dollar ratio is still considered high, when profits are repatriated they are now only worth three quarters of what they were back in 2012.

So what does this deal mean for GWA and the rail industry in general?

The Financial Review’s headline proclaimed “……..win opens NSW rail haulage to competition,” which to be frank is pushing the truth a little too far. Rail freight haulage in NSW has been open to competition for close to two decades now and the fact that there are no less than five operators moving coal in the Hunter would suggest that competition is alive and well.

The ACCC was concerned that that a win for Aurizon or Pacific National might reduce competition, however it appears to have been little more than sabre rattling – the fact that GRail existed n the first place suggests that a third party operator could be established if the will was really there.

Centennial Coal owns a small discrete fleet for servicing its mines in the Hunter and Blue Mountains and jack of all trades Southern Shorthaul pops up from time to time operating short term coal contracts for miners.

What it means for GWA is yet to be seen. In the short to medium term one would imagine it will restore some of the lustre to the ‘jewel in the crown’ status with their US parent.

Even though Macquarie Infrastructure and Real Assets (MIRA) will take a 49% equity stake in GWA, Jack Hellmann, GWI President says, “We are effectively doubling the size of GWA and retaining 51% of a business with stronger long-term free cash flow and a significant portion of GWA’s rail shipments under long-term, take-or-pay contracts.”

GWA has achieved its long coveted goal of establishing itself in the Hunter and with the new regional economies of scale in the region will no doubt be hoping to capitalise on any new opportunities that come along. In the medium term, GWA says it anticipates purchasing two additional train sets (approximately $50m each) to handle incremental tonnages that are expected to be available under the rail haulage contract with Glencore Coal.

And at $ 1.14bn, have they paid too much for the assets and long term contracts? I’ve not seen anyone really crunch the numbers yet but the purchase price was at the top end of the scale of $800m-$1bn suggested back in March.

GWA will gain a 20-year rail haulage contract with Glencore Coal (GC), to exclusively haul all coal produced at GC’s existing mines in the Hunter Valley. Initial volumes under the rail haulage contract are expected to be at least 40m tonnes per year with minimum guaranteed volumes over the first 18 years.

And that’s where some doubt must creep into the deal price. The thermal coal market may not be in turmoil, but certainly the market is volatile and most indicators are casting doubt on the long term future of the commodity – 20 years seems a long way out.

In 2015 GWI purchased the UK Freightliner rail business which derives a substantial amount of its revenue from coal haulage – a part of the business which has already weakened since that purchase. Some analysts predict that coal haulage by rail in the UK will be a thing of the past within a decade.

The Australian coal market, much of which is export, has not seen any decline at this stage, but globally the warning signs are there.

Definitely a case of ‘more to come’.