What’s cooking in the Pilbara?

The bid for Aquila Resources Inc has far reaching ramifications.

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Aquila Resources (ASX: AQA) announced last Friday that it had received an unsolicited bid from Baosteel and Aurizon Holdings (ASX: AZJ) for $3.40 cash per share.

Aquila Resources Limited is a growth-oriented resource explorer and developer focused on metallurgical coal, iron ore and manganese. Since listing on the Australian Securities Exchange in 2000, Aquila has grown rapidly to become a well-respected ASX 200 public company with a large portfolio of bulk commodity assets. Aiming to bring substantial new independent supply to the seaborne metallurgical coal and iron ore markets, Aquila is progressing development of two major Australian projects.

The Eagle Downs Hard Coking Coal Project is an underground longwall coal mine, located in the Bowen Basin, Central Queensland. Construction is well underway, with completion scheduled in the first half of 2017. However, it is the West Pilbara Iron Ore Project, 50% owned by Aquila and the remained equally shared between the private equity firm AMCI and the Korean steel giant POSCO, that is of greater interest.  Even more importantly is the port at Anketell Point, Western Australia, and the associated heavy rail that will serve the Western Pilbara iron mines.

Infrastructure in the Pilbara, from which two in every five tons of iron ore shipped globally are sent, is tightly held by Rio Tinto (ASX: RIO) and BHP Billiton (ASX: BHP). Rio Tinto controls Cape Lambert and BHP Billion ships from Port Hedland and Dampier. Therefore, the jewel in the crown for this takeover is control of a new deep-water port at Anketell. This is located between Dampier and Cape Lambert. Other companies that could use Anketell are Fortescue Metals Group (ASX: FMG), Flinders Mines (ASX: FMS), Iron Ore Holdings (ASX: IOH), Atlas Iron (ASX: AGO) and Brockman Mining (ASX: BCK).

Fortescue Chief Executive, Nev Power, said building a port at Anketell Point would help cement his company’s position as the world’s fourth-largest iron-ore producer and support its plans to develop iron-ore reserves in the western corner of the Pilbara. Mr Power went on to say “it’s not essential to own infrastructure – it depends on us getting the right deal.” Fortescue had held talks previously with Aquila about Anketell, but its interest cooled when Aquila struggled to raise enough funds to build it.

The consortium of Baosteel and Aurizon would have the means to construct the port and associated rail facilities linking it to the Western Pilbara. Aurizon is in the business of developing and operating large rail systems. Aurizon has stated that 432 kilometers of heavy duty rail would be a “multi-user,” whereas the two majors have avoided allowing others to use their railways.

Atlas Managing Director added that the potential new arrangement was “healthy to diversify and facilitate alternative sources of supply.” Starting with 40 million tonnes per annum in 2017, Baosteel and Arizon aim to be shipping up to 350 million tonnes per annum.

Therefore, Fortescue and other mining companies with interests in the Western Pilbara stand to benefit substantially if the proposed takeover proceeds. Development of the fourth deep-water port in Western Australia and associated rail connections would occur sooner and with more assurance now that Baosteel and Aurizon are likely to be involved.

Motley Fool contributor Chris Koenig does not have shares in the companies mentioned.

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