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Fortescue – Atlas deal on track

In what could be a win-win outcome for both companies, junior iron ore miner Atlas Iron Limited (ASX: AGO) could be set to utilise Fortescue Metals Group’s (ASX: FMG) railway line and infrastructure.

Atlas needs a railway to connect its iron ore mines in East Pilbara to Port Hedland, in conjunction with Brockman Mining (ASX: BCK). The company has been looking at building its own railway and has implemented a feasibility study with rail operator Aurizon Holdings (ASX: AZJ) – ex QR National.

According to the Australian Financial Review, Fortescue is keen to maximise the sale price for a 40% plus stake in its rail and port infrastructure. The company is reportedly targeting proceeds of between $3 to $4 billion from the sale to pay down debt. In return for the stake, the winner will receive an annuity, rather than run the infrastructure themselves, which will likely be based on freight carried.

By signing up Atlas as a customer for its rail and port assets, a potential 40 million tonnes of additional iron ore could be added to Fortescue’s existing rail, boosting the annuity and therefore the sale price higher. Atlas, in turn, could face costs of $3 billion to build its own railway and infrastructure, plus an additional $2 billion for a new export terminal at South West Creek. An option to use Fortescue’s rail line would be much cheaper.

There’s also the fact a new rail line from the Pilbara to the coast would add to existing railways run by Fortescue, BHP Billiton, Rio and another planned by Gina Rinehart’s Hancock Prospecting to transport ore from the giant Roy Hill iron ore mine. Adding another railway that might be underutilised doesn’t make much economic sense.

Foolish takeaway

With benefits of sharing the existing railway and infrastructure apparent for both parties, it seems only a matter of time before Atlas and Fortescue come together.

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