Does anyone remember Lance Hockeridge of Aurizon and his heroic mission to build Comrade Colin’s West Pilbara vision, as well to build Comrade Campbell’s Galilee boondoggle? Today, it’s not just West Pilbara and the Galilee that have run off the rails but suddenly existing Aurizon contracts are also in peril, from UBS:
Iron ore haulage accounts for c.10% of group earnings
With iron ore risk spreading through the market it is worth revisiting Aurizon’s exposure. The company is currently annualising $330m of revenue and $110m of EBITDA (11% of FY16E group pre-tax profit) using $430m of assets (4% of group) on four haulage contracts with high cost junior miners. Customer concentration risk is a concern, with two customers (Cliffs and Karara) accounting for c.90% of the earnings, and the parent companies both being foreign domiciled. While these parents appear willing to continue producing at the current low price (and our forecasts assume the status quo) we believe the possibility of Aurizon’s take or pay protections being tested in the near term remains a risk. We note Aurizon has not disclosed whether contract obligations extend to supporting facilities from parent companies.
I have no idea why Cliff’s hasn’t yet shut but it surely will, it is higher cost than Atlas. Gindalbie is also very expensive though has the advantage of Chinese sponsorship so may survive a while longer.