qr national rail makes dma one to watch

This was posted on BRM thread which we all know has the same issues as DMA when it comes to infrastructure.

With QRN moving into the Pilbara, it really does heat up DMA's interest.

This probably goes a long way to explain the recent light volumes as punters are taking a position.

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Atlas Iron: red wine, not red ink

Debt wary .?.?. Ken Brinsden at the company’s Wodgina project site. Photo: Bloomberg
AYESHA DE KRETSER
The new managing director of Atlas Iron, Ken Brinsden, spent Monday night drinking red wine with a bunch of Chinese steel mill executives in Beijing but insisted the next day his croaky voice was the result of a cold rather than a hangover.

It was easy to believe, given the thick grey smog that usually obscures any glimpse of blue sky over China’s sprawling, congested capital city, infiltrating even the healthiest of lungs.

Brinsden was in Beijing to celebrate another milestone in Atlas’s already long list of achievements since the miner started shipping iron ore in the depths of the global financial crisis in 2008.

Atlas sent its 10 millionth tonne of ore to China from Port Hedland in March and thought the occasion worth celebrating with its customers.

“Fortunately, they’re into their red wine these days so we missed the maotai [Chinese rice wine], thank God, but needless to say a lot of red wine, Australian red wine, was drunk,” Brinsden jokes.

While 10 million tonnes might sound tiny compared with the 60?million tonnes Australia’s biggest iron ore miner, Rio Tinto, digs up in just one quarter, it is no small feat considering the economic climate throughout the period Atlas managed to grow. Its revenue rose from $26.43?million in the 2009 financial year to a staggering $584 million in 2011.

“When we first started selling iron ore it .?.?. was really tough. We were selling our first cargoes literally in October 2008, so it was a baptism of fire,” recalls Brinsden.

But the self-assured, low-key miner backed itself and pressed on with plans to grow, armed with the knowledge that if it could sell iron ore in the dark months of 2008, it stood a good chance in any commodity price environment.

“To be honest, that was what we were thinking at the time, says Brinsden. “Jeez, if we can still succeed then we’re going to be OK. It really was formative. It was a tough time making the decision to commence our first mine when the world was literally collapsing around our ears. But full credit to David [Flanagan] and the board who put the bit between the teeth and said look, it’s a modest investment we’re making – it was probably about $15 million at the time – and they said, “Nope, we’re going to do it. It’s what our shareholders want us to do.’ And we’ve never looked back.”

As Atlas looks to grow from 6?million tonnes a year to its “horizon one” objective of 15?million tonnes, it is undoubtedly not forgetting where it has come from.

Brinsden admits getting from where it is now to the 47 million tonnes a year slated under its “horizon two” outline will put more of a drain on its bottom line than the first expansions.

But in an environment in which commodity prices are broadly expected to fall, wage inflation runs rampant and capital cost pressures in Australia spiral, Atlas is adamant it will not overstretch itself by investing in the capital-intensive rail infrastructure it desperately needs to get to an annual run rate of 47 million tonnes.


“One of the tools we can use to minimise the amount of debt that Atlas needs to take on is to work with third parties, and we continue to look to do that,” Brinsden says.

“There is inflationary pressure in the construction environment, there’s no doubt about it. The scale of our projects is helpful because it allows us to work with the second-tier contracting groups. My view is that they are generally more competitive than the tier-one contractors, who at the moment are very, very busy dealing with big projects, whether it’s in iron ore, natural gas or in Queensland with coal seam gas.”

Atlas has no plans to change this model as it gets bigger and is adamant that it does not need to despite the looming rail challenge.

“The big-picture view is that we’re not going to be a company heavy on debt. We think we’re going to be well served by the incremental growth,” Brinsden says.

The question of infrastructure investment has been thrown into the spotlight this week by revelations that Fortescue Metals Group chairman Andrew Forrest was on the brink of cutting a deal that would have secured billions of dollars worth of government support for small miners.

Atlas would have been one of the key beneficiaries of any deal that allowed miners to write off their investment in infrastructure against the cash generated from their mine sales.

In iron ore, the majors have established massive barriers to entry by keeping their rail infrastructure – and also, in the case of Rio Tinto, its ports – for their exclusive use even though much of it was funded by generous government royalty concessions when it was built.

Only Fortescue has been able to build a dedicated rail line in the past decade, with Gina Rinehart expected to follow by the end of 2014 when Hancock Prospecting starts shipping iron ore from Roy Hill. But both companies have had to take on hefty debt burdens to achieve their aims, with Fortescue recently raising $US2 billion in the US bond market to fund its run to 155 million tonnes a year and Hancock looking to secure up to $7 billion in bank debt to get a 55 million tonne a year operation up and running.

Fortescue’s state agreement with Western Australia stipulates that it must provide haulage services for smaller miners at commercially negotiated rates. But, despite Forrest’s insistence that he is working in the best interests of all by coughing up capacity on his rails, small miners on the other end of agreements struck with Fortescue complain the terms are heavily weighted in the infrastructure owner’s favour.

Without a route to market, iron ore in the ground is practically worthless.

And the big guys will undoubtedly push hard to exclude the value their infrastructure adds to their iron ore when calculating a basis for the mining resources rent tax, limiting the government’s tax take.

Atlas is weighing two options to get its iron ore to port – paying Rinehart’s Hancock Prospecting to access its rail or backing a third-party provider in QR National to build an altogether new line that any small miner could access.

Both options have advantages. Hancock Prospecting has already started building its railway line and expects first production by 2014. Cutting a deal with Australia’s richest person, however, will not be without its challenges.

QR National still needs to clear the complex West Australian government approvals process but could be more generous in any haulage fee arrangements, given it needs to build market share on the west coast.

Atlas will not delineate a path for its “horizon two” growth until the end of the calendar year but is expected to update the market on its thinking within the next two weeks.

The market will be watching closely to determine whether real competition may finally be on its way to the Pilbara.