Queensland rail operator Aurizon Holdings Ltd (ASX: AZJ) could be heading for a big fall in earnings, with fears the state's coal mines are on the brink.
Following the election result in Queensland, coal miners are bracing for hostile policies being introduced by the incoming Labor Party. That's no certainty yet, of course, with counting still to decide a few crucial seats. So far, Labor has 42 seats and the LNP 35 but needs 45 seats to win outright with 3 seats in contention. The LNP leads in two of those seats.
But coal miners fear the Labor party could unleash a number of policies heaping more pressure onto the miners.
Coal prices have continued to fall, metallurgical coal (coking coal) has fallen from more than US$300 a few years ago to just above US$100 a tonne. Thermal coal is trading at less than half the prices of 2012, at around US$60 per tonne.
Queensland Resources Council boss Michael Roche has told Fairfax Media that around half of Queensland's coal mines are running at a loss. Several mines owned by the likes of Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), Glencore/Xstrata and Peabody Energy have already closed. Any policy uncertainty could force some mines to close – with many only operating because they are locked into paying haulage charges for coal, whether or not they use it. Known as take-or-pay, miners pay a set amount to the likes of Aurizon (formerly QR National) to transport their coal to port.
But even if the incoming Labor government does support the coal industry, miners are still dependent on coal prices and may well not renew their contracts with Aurizon when they end. Aurizon hauled around 160 million tonnes of coal in Queensland in the last 12 months, with tonnage down slightly in the last quarter. The company's contracted coal tonnes have fallen from 209 million tonnes in 2011 to 193 million as at the end of June 2014.
Add in the company's $1.4 billion takeover of iron ore miner Aquila Resources in conjunction with China's Baosteel in May 2014, when commodity prices were above US$105 per tonne, and the company faces a number of headwinds.
Foolish investors might want to give Aurizon a wide berth for now.
