Aurizon may close down losing business

Mining services stocks have taken a beating in the past couple of months and analysts believe there may be value in the industry if companies can shelve unnecessary costs.

Last week, speculation was swirling that Aurizon (ASX: AZJ) (formally QR National) could discontinue its intermodal business next year on the grounds that it remained uncompetitive and failed to return any significant profit for the company. Merrill Lynch analysts said it was “hard to see any outcome other than closing it down”.

Aurizon did not comment on the rumours but the intermodal industry is known to be highly competitive. The main rival is Asciano’s (ASX: AIO) Pacific National rail business, which has about two-thirds of the intermodal market and Melbourne’s Specialised Container Transport has about 30%.

Analysts also believe that the company operates in a highly competitive market which produced very skinny margins, but it insists it is impressed with the business thus far and hopes for it to break even next financial year.

Aurizon is not the first rail operator to face uncertainty in recent weeks. Fortescue Metals Group (ASX: FMG) has been in a stand-off with smaller miner Brockman Mining (ASX: BCK) over the use of its extensive railway in the Pilbara region. Brockman insists that Fortescue’s current rates for the rail link should be more accessible for the miners that do not use the full length of track and cannot afford the higher costs.

Fortescue wishes to take advantage of its position as the more dominant company, and believes it should be rewarded for its investment in setting up the railway. Fortescue is now likely to focus on Brockman’s ability to fund additional infrastructure in its defence against the juniors attempts to force its way on to the miner’s railway.

Foolish takeaway

Aurizon’s coal division currently remains the most competitive for the company and returns approximately 50% of revenue sales. If the company axes its intermodal business, it is likely to have mixed reactions. Many investors would no doubt believe that short-term success could be foregone for long term profits, especially when the coal industry has been anything but impressive in the past 12 months. Time will tell, but Aurizon is far from an exciting stock and with prices dropping all around it, perhaps money could be better spent elsewhere.

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Motley Fool contributor Owen Raszkiewicz does not own shares in any of the above mentioned companies.

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