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Aurizon chief executive Andrew Harding will be questioned on the likelihood of winning coal haulage contracts off rival Pacific National at the company's interim results next week as investors worry about the rail group's growth options.
Investors are closely watching the outcome of several Pacific National haulage contracts that are up for renewal with coal miners, including Mach Energy in the Hunter Valley, amid concerns over the rail group's growth options. The Mach contract is believed to have been recently decided but it is unclear who has won the contract.
Aurizon has been having difficult negotiations with its regulator, the Queensland Competition Authority (QCA) on how much money it can make from its rail networks business between July 2017 and June 2021, and the expected early loss of an iron ore haulage contract in Western Australia.
Aurizon's stock has dropped 14 per cent since late December, when the QCA published its draft decision. The maximum allowable revenue the company can earn under the decision is $999 million lower than where Aurizon believes it should be, at $3.9 billion. Aurizon is disputing the decision.
The rail group is also likely to lose its most valuable iron ore haulage contract, with US group Cleveland-Cliffs, after the miner said last week that it was likely to shut its WA iron ore business this year due to losses. The closure of the business would end Aurizon's haulage contract two years earlier than expected.
Income from iron ore haulage has typically accounted for about 9 per cent of Aurizon's group earnings before interest and taxation and Cliffs has been the rail group's biggest iron ore customer.
Macquarie Wealth Management has warned that although Aurizon is expected to receive a termination payment of about $30 million, the loss of the contract could weaken the rail group's earnings growth over the next two years.
Following the Cliffs' statement, Macquarie lowered its 12-month target price on Aurizon to $5.09 from $5.15, noting termination of the contract would accelerate "the loss of scale" in the rail group's WA business.
Aurizon's shares, which are being supported by a stock buyback, closed at $4.70 on Friday, down 6 per cent over the past 12 months compared with an 8 per cent rise in the S&P/ASX 200.
Some big institutional investors have avoided investing in Aurizon due to concerns over the company's growth outlook and concerns that China will increase domestic production of coal, reducing its need to buy Australian coal.
Analysts have mixed views on Aurizon. Macquarie rates Aurizon "outperform", citing the company's strong cashflow, cost cutting and "incremental growth opportunities", but FNZC and JP Morgan rate it "underperform" and "underweight" respectively.
Despite the rebound in coal prices last year, the Hunter Valley Coal Chain, which exports coal from about 35 mines through the Port of Newcastle, has not met its volume targets in recent months, with total volumes down 8.5 per cent in January.
Aurizon reports half year results on February 12, when it will also disclose its quarterly haulage volumes.
Investors are looking for an update on the proposed sale of Aurizon's Acacia Ridge intermodal terminal south of Brisbane to Pacific National and trucking group Linfox.
The Australian Competition and Consumer Commission has been reviewing the sale but has delayed its expected decision date of February 1 until mid-February after requesting more information from Aurizon and Pacific National.
Aurizon hopes to reap about $220 million from the sale, which comes as the rail group gets rid of its intermodal businesses to focus on its core coal and bulk haulage businesses.
Investors will also be looking for more details on a proposal to buy Queensland's Wiggins Island Coal Export Terminal despite the sale of a key mine by one of the port's owners.
Wesfarmers Curragh, which was one of WICET's eight original owners, sold its Curragh coal mine last month to US producer Coronado Coal, which is owned by Texas-based private equity group EMG.
The Curragh mine was an important part of a plan by the rail group to team up with financial group Macquarie to consider a bid for WICET, which has an enterprise value of about $4 billion and exports coal from the Port of Gladstone, as well as buying some of the assets owned by its miner customers.
This article first appeared on www.afr.com
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