Coal prices attract buyers for Aurizon’s billion-dollar rail divestment

Aurizon says high coal prices are helping buoy the market for the billion dollar coal haulage business it must divest as a condition of its $2.4 billion acquisition of One Rail last month.

After the company’s full-year results on Monday, Aurizon chief financial officer George Lippiatt said a decision on the divestment of the East Coast Rail (ECR) assets, which it acquired with One Rail, would be made in the December quarter.

He said the group was expecting non-binding offers from potential trade buyers next month, with about 10 parties signing confidentially agreements.

Aurizon will operate trains on rail tracks stretching from South Australia north to Darwin after buying One Rail.

“In parallel with demerger preparations, we’ve been pleased with the level of engagement from trade sale buyers and are expecting non-binding offers in September,” he told analysts and investors on a conference call.

“I can also say that the business continues to perform well in the face of weather disruptions and that recent coal prices underscore the demand for the product ECR hauls, and we’ve made good progress in the establishment of the stand-alone company.”

Analysts have ascribed a billion dollar enterprise value to the ECR business.

Aurizon shares dropped as much as 6 per cent on Monday to a low of $3.78 after it slashed its final dividend and flagged a tepid outlook for its remaining coal haulage business as it banks on the One Rail deal to diversify to more market-friendly commodities like as grains, copper and rare earths.

“The company has delivered a solid operational and financial result despite a challenging year with the ongoing COVID-19 pandemic, major flooding events and customer-specific reductions in production impacting our volumes,” Aurizon chief executive Andrew Harding said.

The group expects earnings before interest, tax, depreciation and amortisation (EBITDA) to be in the range of $1.47 billion to $1.55 billon for the 2023 financial year. This includes 11 months’ contribution from the newly acquired One Rail business and the impact from wet weather last month.

“We think the outlook commentary is mildly disappointing, however, there may be some conservatism given macro context,” UBS said after the result. UBS said it was seeking to understand more detail around the weakness from Aurizon’s bulk haulage business and coal revenue yield outlook.

Moody’s analyst Kenny Lo noted that Aurizon’s 2022 earnings were flat due to lower haulage volumes from weather-related disruptions and customer-specific production issues – offset by cost reductions and Aurizon’s CPI-linked contract rate escalations.

“Going forward, the ACCC’s approval of Aurizon’s acquisition of One Rail Australia is credit positive, because it enables Aurizon to deliver on its strategy of expanding into bulk haulage and diversifying from coal, with key challenges being integrating the acquisition and managing the near term divestment of East Coast Rail,” Lo said.

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