Published in the September 2008 Australia’s Mining Monthly
Asciano Group has taken a half billion dollar-plus plunge into the booming Queensland coal market. The move is already having major ramifications. It has stirred up the industry, Asciano’s incumbent major competitor, the government and even itself as the debt-laden southerner prepares for further takeover action.
Along with the potential break-up of Queensland government-owned Queensland Rail’s rule over the coal transport system, there is the spectre of potential federal intervention. A major maritime union claims any takeover of Asciano would pose a clear risk to the national interest.
A string of recent events has opened the way for the biggest shake-up Queensland’s coal industry has probably ever seen. It comes at a time when being in the rail, ports and infrastructure business is a good place to be.
Queensland coal exports are expected to grow from the current 185 million tonnes per year to more than 300Mtpa by 2015 and 380Mtpa by 2020.
There are 40 operating coal mines in the state and a potential capital investment of $11.5 billion over the next five years, along with another $9 billion on coal transport infrastructure.
The game was on last month when ports and rail operator Asciano rejected an unsolicited and undervaluing $2.9 billion, $4.40 a share takeover offer from a consortium of United States buyout specialists Texas Pacific Group and Global Infrastructure Partners. TPG was one of the main partners in last year’s failed attempt to privatise Qantas.
Melbourne-based Asciano has two rail divisions – Pacific National Intermodal and Pacific National Bulk. It also has two ports divisions – Patrick Container Ports and Patrick Auto, Bulk and General Ports.
Patrick, now there is a name that rings a few bells on the waterfront.
Asciano chief executive officer and largest shareholder Mark Rowsthorn, with a shade under 11%, dismissed the bid as opportunistic. However, he added that the board was open to an offer that reflected fair value and one that injected much needed cash without having to relinquish management control.
The cash-debt aspect became clear when Asciano announced a full-year net loss of $182 million to June 30. That loss was driven by $238.8 million in write downs from the unprofitable grain business inherited from Toll Holdings, the costs associated with its spin-off from Toll and July 2007 listing, and a $103 million loss from its sale of a stake in Brambles after the group’s failed bid for that company.
The numbers also showed a net bank debt of $4.5 billion, $270 million of which has since been paid off.
To alleviate the problem in the current debt-conscious market environment and shore up Asciano’s takeover defences, Rowsthorn signalled plans to sell a minority stake in some of its four businesses to raise up to $1 billion before the group starts rolling over its debt in May 2010.
The move is also an attempt to put some value back into the share price, which rose from last year’s $11 listing to $11.43 the same month before sliding to $2.73 in July. It had recovered to about $5 at the time of writing.
But what has put the cat among the Queensland coal pigeons is the 10-year rail haulage contracts with mining giants Rio Tinto and Xstrata from their Goonyella and Blackwater mines, initially 14Mtpa combined from early 2010.
To underpin the deal, Asciano’s Pacific National will spend $380 million on rolling stock and infrastructure, and another $200 million on extra growth capacity. Asciano already has coal haulage contracts with both companies in New South Wales’ Hunter Valley.
That “extra growth” is a clear indication the group intends going after a much bigger slice of the Queensland coal market.
Asciano has to negotiate access and other infrastructure arrangements with Queensland Rail. While Pacific National has never been in the Queensland coal market, it has been hauling general freight from Brisbane to Cairns since 2003.
While QR chief executive Lance Hockridge has welcomed Asciano’s move into the Queensland coal market, analysts and coal industry leaders say it opens the door to other players, QR’s eventual dismantling and possible part privatisation.
Hockridge said while Asciano’s announcement was not unexpected and would be good for competition, the government-owned corporation would fiercely defend its market position.
QR is midway through a $3.75 billion upgrade of its Queensland coal network. Queensland’s $25 billion a year resources sector is its largest customer. QR moved some 165Mt of coal alone worth an estimated $1 billion through the Bowen and Surat basins to export ports in 2006-07.
Both Hockridge and QR chairman John Prescott have rejected any full or partial privatisation, saying it is a matter for government.
The Queensland Resources Council and coal companies have also welcomed Asciano’s entry, saying it should make QR look again at its business structure.
QRC chief executive Michael Roche believes it is essential that QR separates the above rail (station infrastructure and rolling stock) and below rail (land and fixed infrastructure comprising the rail network) operations. He said it was disappointing that QR’s recent restructuring had gone only part way towards the goal.
The QR freight business, including coal, remains a division of QR Ltd, while the below-track business of QR Network will be set up as a separate subsidiary. Roche said “all parties would be better served by a complete separation of the regulated QR Network business from the rest of QR Ltd”
The problem for the Queensland Government in all of this is the negative effect it could have on the revenue base of QR and the government. QR’s coal revenues have long been seen as underpinning Brisbane’s estimated $600 million to $1 billion a year loss making suburban rail network.
This, some analysts believe, will force the government to again consider restructuring QR from a vertically integrated and freight passenger rail track bed company into multi-tiered competing operators.
On the wider stage, the Maritime Union of Australia has voiced strong opposition to the private equity takeover bid for Asciano after three years of warnings to the Australian Competition and Consumer Commission that stevedoring companies risked becoming takeover targets.
MUA national secretary Paddy Crumlin said any takeover of Asciano, which operates Patrick, one of the nation’s two big stevedores, would devastate the Australian waterfront.
“Just as with the attempt to take over Qantas, we are looking at a corporate play to seize a company that is critical to the national interest,” Crumlin said.
The proposed takeover represented a policy failure by the Rudd government because it declined to take responsibility for regulating ports, he said. This, with container trade projected to triple over the next 15 years.
Queensland coal is a big stakes game. The state has reserves of 30 billion tonnes with a rail network linking 40 mines to six terminals and four deepwater ports on the Queensland coast.
The Queensland government expects to rake in an extra $580 million this financial year after lifting the royalty on coal that sells for more than $100 a tonne from 7% to 10%.
Based on the current 7% royalty rate, Queensland’s coal industry was already forecasting to double its revenue to the state to at least $2.5 billion in the current fiscal year. Up to $3 billion was possible through production expansions, and there is expansion aplenty.
Massive project proposals from Xstrata Coal, the BHP Billiton Mitsubishi Alliance and Waratah Coal could boost Queensland’s coal exports by another 40%. It could also lead to the first coal port in 25 years built in the state.
The trifecta of proposals for the Bowen, Galilee and Surat coal basins represents a quantum leap for Queensland’s coal industry.
The biggest, a $5.3 billion port and rail network from Canada-listed explorer Waratah Coal, is centred on the Galilee Basin, which Waratah Coal chief executive Peter Lynch says is Australia’s biggest undeveloped coal province.
Waratah is looking at a range of partners and potential third-party users to fund the new rail and port, with an export project capacity of 50Mtpa beginning in late 2012.
Waratah’s Galilee proposal includes a new mine near Alpha, a port near Shoalwater Bay, between Rockhampton and Mackay, and a new 500km rail line that would open the Galilee Basin to coal exports for the first time.
BMA wants to build two new mines at Daunia and Caval Ridge, south of Moranbah and expand the Goonyella Riverside Mine, which would increase its coking coal exports by about 20Mtpa.
A third proposal from Xstrata Coal is for a 30Mtpa open cut coal mine near Wandoan.
To add to the upside, a Queensland-based consortium is pushing ahead with bold plans for a $14 billion, 3300km rail line from the Pilbara to Queensland’s Bowen Basin coal reserves with six industrial smelter hubs at each end after gaining support from 19 steel producers.
The company behind Project Iron Boomerang, East West Line Parks, says the steelmakers have signed three-year confidentiality agreements to discover more about the project. The $172 million feasibility study is expected to take just over two years.
The total cost of the project is estimated at $52 billion. The construction and commissioning phase is estimated at $14.3 billion, inclusive of rail line ($8.3 billion), rolling stock ($2.5 billion) and $3.5 billion for industrial land.
The company anticipates a commitment to the study by the end of the year and construction to start in 2010-11.
