I think one of the most dangerous risks to long-term investors is the risk of holding stranded assets. One example of a popular company facing this risk is rail operator Aurizon Holdings Ltd (ASX: AZJ). Aurizon is in the business of transporting coal and iron ore by rail, from mines for export. The investment thesis for the company relies on the fact that it benefits from volume shipped, rather than the price of coal or iron ore received.
One of the reasons Aurizon is considered to be on a growth trajectory is its Abbot point expansion project. In April 2013, the company announced:
“Aurizon today welcomed the shortlisting by the Queensland Government of the NorthHub consortium, comprised of Aurizon and Lend Lease, for the potential staged expansion of new export coal capacity at the Abbot Point Coal Terminal in North Queensland.”
I argued several months ago that Aurizon shareholders are exposed to unacceptable risk if the company goes ahead with the development. Yesterday, Lend Lease Group (ASX: LLC) announced that the company would not go ahead with the expansion of the Abbot Point coal terminal. Aurizon shareholders ought be wondering what the company will do without its partner.
I think it is reasonable to conclude that Lend Lease believes the project was not worth the risk. Indeed, Bloomberg reports that CEO Steve McCann told analysts that: “In any major project, we do go through a very rigorous process and we consider all the relevant aspects and we do a very rigorous due diligence and that includes environmental and other aspects.”
Could it be that Lend Lease is unwilling to lend its name to a dredging program that many believe threatens significant damage to the Great Barrier Reef? If so, the move is a far-sighted one: over 145,000 people have signed a petition asking the company to refrain from participation in the project. If the Reef were to be damaged, the public might take a long time to forgive, and litigation might well follow. Lend Lease might be also be cautious of the potential risk that there will not be sufficient demand for coal, for the several decades the port is expected to operate.
Lend Lease provides a sharp contrast to Aurizon. In fact, Aurizon’s chairman waited an agonising 45 seconds after being questioned about the risk that its planned coal infrastructure projects may become stranded. Bloomberg’s Elisabeth Behrmann reports that the company stated in an e-mail that it will “continue a dialogue with government regarding the Abbot Point Expansion.”
Lend Lease is not the first company to drop plans to develop Abbot Point. BHP Billiton Limited (ASX: BHP) once planned a $5 billion project to develop a terminal at Abbot Point and a rail line linking it with mines. However, Australia’s most successful mining company abandoned the project in November 2013. This decision followed a report by the Centre for Policy Development that found further port expansions could be unviable. To quote report author Laura Eadie, “Queensland is likely to still have surplus port capacity by the end of the decade.”
Opinions differ as to whether the Abbot Point port expansion will be viable. Understandably, the Queensland Resources Council envisages that it will be. However, in my view there is clearly a significant risk that the Abbot Point port facilities could one day become a stranded asset, if they are built at all. Why risk it? There are much safer stocks available at good prices.
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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.