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Aurizon’s $6 billion deal

Queensland’s Galilee Basin is rich in thermal coal resources but is relatively undeveloped because of the lack of infrastructure to get the coal to port. That may be about to change.

The most expensive infrastructure project in Queensland’s history appears likely to go ahead after Aurizon Holdings (ASX: AZJ) – formerly QR National and GVK Hancock, a joint venture between Gina Rinehart’s Hancock Prospecting and India’s GVK inked a deal to spend an estimated $6 billion building a 500km rail line and coal terminal.

Under the deal, the two companies will work together to develop a rail line from the Galilee Basin to Abbot Point and a new coal terminal, with the capacity to export up to 60 million tonnes of coal per year. The rail proposal has received state and federal government approvals and would be open to other users.

However analysts have questioned the economics of the project, given the current soft coal prices. At present they are below US$100 a tonne, with analysts estimating they would need to rise to US$120 a tonne to make the project economical.

Coal miners Yancoal Australia (ASX: YAL), New Hope Mining (ASX: NHC) and Whitehaven Coal (ASX: WHC) have all been struggling with falling coal prices, which has seen their profits fall, and their share prices tank over the past six months. Over the same period the ASX 200 index is up more than 18%.

Aurizon – as the main transporter of Queensland’s resources from mine to port and Australia’s largest rail freight company, appears optimistic about the long term future of coal, based on sustained global demand for Australia’s coal.

Foolish takeaway

Aurizon expects growth to continue and has invested in additional rail capacity that will see an extra 76 million tonnes of capacity delivered in Queensland by 2015 – before this most recent deal was announced. Despite the current low prices for coal and environmental concerns over coal, Aurizon is pushing ahead with its plans. Sounds fairly high risk to me.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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