Tough conditions for Qube’s ports and bulk division

After trading at up to $2.76 per share last week, Qube shares sank under $2.50 after investors absorbed the gloomy contents of the trading update.

The latter was attached to a positive announcement that the Commonwealth Government had approved Qube’s Moorebank freight hub, and would contribute $370m towards the $1.9bn project.

Qube’s trading update said it has finalised the extension and amendment of its contract with Atlas Iron, with the contract now extended a further seven years.

The new contract provides for interim arrangements for up to 24 months during which Qube has reduced its base charges to Atlas but with an upside sharing arrangement whereby Qube may earn additional revenue depending on the iron ore price received by Atlas and the free cash flow generated by Atlas.

At the end of the interim arrangements, the contract pricing will revert to a rate structure with a set rate per tonne linked to volume.

As a result of Atlas temporarily suspending its operations, throughput at Utah Point was lower in May and will be below previous levels in June.

Qube also flagged pressures elsewhere, with lower volumes and rates in a number of areas of its business.

Severe weather in New South Wales in April also impacted Qube’s rail operations in New South Wales.

Overall, while Qube expects increased underlying earnings per share in FY 2015 vs 2014, it doesn’t expect trading and economic conditions to improve in FY 16.

Volumes from Atlas will be below previous levels until the December quarter when the Mt Webber mine is expected to be producing iron ore at its target volumes

The earnings in the ports & bulk division in FY 16 will also be impacted by the completion of several contracts during the second half of FY 15 including the Yara contract at Dampier and project work at Roy Hill, and the previously announced cessation of the Arrium contract.

Qube said: “The impact of these factors will be partly mitigated by the contribution from new contracts secured by Qube Ports & Bulk in FY 15 and the full year impact of acquisitions and growth capital expenditure completed in FY 15. However, based on current information and excluding the contribution from any new contracts or acquisitions, Qube expects that the underlying earnings from the Ports & Bulk division will be lower in FY 16 compared to FY 15.”