Commodity slump hits Aurizon

Aurizon’s share price slid 10% this morning after the company lowered its coal volume forecast, and announced roughly $215m in asset impairments ahead of its half-yearly report in February.

The Queensland-based rail operator said volumes in its major freight operation, and minor iron ore haulage business, would stick to prior guidance.

But it downgraded its annual above rail coal forecast from 210-220mt to 202-212mt – a difference of as much as 8.2%.

“Given the current market conditions for our coal customers, there is a higher level of uncertainty over second half volumes than in recent years,” the company explained in an ASX release on Wednesday morning.

Aurizon also announced its West Pilbara Iron Ore Project (WPIOP) had been put on hold.

Guidance for a $60-$65m impairment was reported in relation to the WPIOP investment.

Aurizon last year partnered with Chinese steelmaker Baosteel to acquire Aquila Resources, with the pair saying they planned to develop the WPIOP, a significant greenfield iron ore mine, rail and port project in the north-west of Western Australia.

The severe downturn in the price of iron ore since then means the project will be put on hold, Aurizon said.

“The CEOs of the participating companies, Aurizon, Baosteel Resources, POSCO and AMCI, met in Hong Kong on December 21 to review progress of the WPIOP,” the company told the ASX on Wednesday morning.

“While the CEOs received reports on considerable progress in areas such as the capital and operating costs of the mine and infrastructure, the current market conditions and uncertainty about future supply and demand were central to the CEO considerations.”

Aurizon continued: “…no material further work will be undertaken on the definitive feasibility studies. The Aurizon board has endorsed this decision.”

The participants will meet again early in 2016 to reconsider the project and market status.

“Aurizon is now actively considering the implications of this decision, particularly in relation to employee impacts and Aurizon’s carrying value of the project.”

Aurizon’s current capitalised value in the Aquila project is $91m, and the company has also reported $80-$85m in capitalised project costs.

Additionally, Aurizon announced guidance for a $30m write-down due to uncertainty in the expansion of its Central Queensland Coal Network.

“While this amount could be recovered through the regulatory process at a future date, a decision has been made to impair the costs due to the uncertainty surrounding the project’s timing and the current market outlook.”

The most significant asset impairment is a $125-$145m write-down in the company’s rollingstock value.

Aurizon is undergoing a substantial efficiency overhaul, which includes the removal of a significant volume of locomotives and wagons from its fleet, thus a significant asset impairment is expected in the half-yearly report.

“Our focus in this area has seen a marked improvement in performance metrics in recent years,” the company said, “with performance ahead of original expectations over the past twelve months.”

In the two year period ending June 30, 2015, Aurizon’s locomotive utilisation improved by more than 29%. Wagon utilisation lifted more than 23%, while labour productivity rose more than 20%, and fuel usage dropped roughly 7%.

Reviewing the situation, Aurizon boss Lance Hockridge looked to reassure shareholders that the company was still in a good position.

“Notwithstanding the very challenging market conditions for our customers our business continues to be resilient,” Hockridge said.

“Iron ore, intermodal and below rail coal tonnes remain consistent with previous guidance and above rail coal tonnes are only slightly down on our expectations.

“Whilst it is disappointing our earnings for the first half of FY16 will be below the prior year’s result, the resons are essentially one-off.”