How Aurizon CEO Andrew Harding’s bet on rail was a bet on the economy

Like Warren Buffett, Aurizon chief Andrew Harding sees the freight operator as an enabler of economies. The catch? Railroads eat capital.

Warren Buffett is a fan of railroads. But the billionaire investor urges patience.

Last year, Buffett carved out a section of his annual letter to investors to talk about Berkshire Hathaway’s North American freight hauler Burlington Northern Santa Fe. The reason he liked rail, is that it made economies move.

“Rail is essential to America’s economic future,” Buffett said in the letter. “It is clearly the most efficient way — measured by cost, fuel usage and carbon intensity — of moving heavy materials to distant destinations”.

The catch? Railroads eat capital. They need to play at scale to deliver returns. This is where Australia’s own long-hauler, Aurizon, is on the cusp of a major shift.

In a market where tech gets all the attention, rail’s image of another industrial age, means Aurizon often goes unnoticed. But the Australian rail major is worth noting. It operates one of the biggest contiguous rail networks in the world.

Aurizon started out hauling coal in central Queensland. Its bright yellow locos run across every mainland state and through to Darwin. For years the operator was tied to ultra-long term coal contracts, many with regulated predictable returns. But in the last five years, it has been slowly changing the mix of its business.

Andrew Harding, chief executive of Australia's biggest rail freight operator Aurizon, in Fortitude Valley, Brisbane. Picture: Lyndon Mechielsen / The Australian

It now carries containers from one side of the country to the other. It hauls iron ore, rare earths, bauxite, cargo and 60 per cent of the nation’s grain crop, in other words, it’s the stuff that makes economies tick,

In coming months, Aurizon’s efforts to grow beyond coal is about to get a big boost. It starts an up to 15-year contract shipping copper from BHP’s multiple mines in South Australia. The first 10 years of the BHP contract is worth $1.5bn.

Aurizon chief Andrew Harding sees the freight operator as an enabler of the Australian economy, currently moving more than 200,000 containers annually.

Where coal volumes are likely to be significant but flat and in longer term decline, Aurizon’s challenge is aligning itself to parts of the economy slated for growth: copper, rare earths, bauxite and grain and trade.

This means Aurizon needs to build s business can eventually supplant the 85 per cent of earnings that currently come from coal. Harding is confident this will be the case, helped by a long runway for coal.

“As long as the population is growing and people need metals or grains and so on, your business will grow with the background business,” Harding tells The Australian.

“You still need to be successful in the marketplace, but the background business is growing”.

There’s no doubt the bulk of Aurizon’s earnings still come from hauling coal from mines to ports and power stations. Both likely be in decline over time, but met coal, in particular, is expected to be in demand to fire China’s steel mills for decades yet.

Harding, a former Rio Tinto executive, has now set out a challenge to double the amount of bulk or non-coal freight Aurizon carries by 2030.

One way of doing this is by going up the value chain. Aurizon now owns several port berths across Queensland, Adelaide and Darwin. This gets cargo from its rail trucks directly onto ships, without multiple handling along the way.

Rail freight is a Warren Buffett favourite.

This port link also helped Aurizon nail down its long-term BHP copper contract, with the miner developing a massive copper precinct based on Olympic Dam and its recently acquired Prominent Hill, and Carrapateena mines in outback South Australia.

BHP was a deal that came together ahead of time, and began when Aurizon acquired South Australia’s One Rail for $2.35bn in 2021.

This buyout was a calculated bet by Harding that’s starting to pay off.

Two-thirds of Australia’s copper reserves are in South Australia. 40 per cent of Australia’s magnetite is there and 20 per cent of Australia’s grain production. But as copper production grows, so will demand for transport.

He saw the strategic opportunity in One Rail as the freight operator behind the Adelaide to Darwin route and had also been servicing the copper mines of then mid-sized miner Oz Mineral.

Two years later, BHP acquired Oz Minerals for nearly $10bn to help turbocharge copper production in South Australia, based on Olympic Dam.

From this October, BHP will use Aurizon’s locos to haul its copper concentrate to Port Adelaide.

It’s a major change for the miner because until now, the hundreds of thousands of tonnes of copper produced by the massive Olympic Dam mine have been moved to Port Adelaide by trucks.

Now product will be transported by truck to Aurizon’s new nearby rail hub in Pimba, sitting between all three BHP copper mines and a new fourth one under construction. From there, copper will be moved by rail directly to Aurizon’s port terminal.

Harding will be taking investors and analysts on a tour this week to get up close to the new copper business and port infrastructure.

A loaded coal train is seen passing through the outskirts of Singleton, in the NSW Hunter Valley. Picture: AAP Image/Dan Himbrechts

The Olympic Dam deal is an example of rail creating new markets for itself, Harding says. Containers being moved between states and from coast to coast are next in his sights.

“To put it in perspective, if you looked at the number of containers that get moved across Australia, there’s about a million moved by rail and about six and a half millions moved by trucks.

“You can now bring a ship into Darwin, or a ship into Adelaide, and we can take the product off the ship, we can put it on one of our trains, and we can take it anywhere we want to take it in Australia and economically”.

“We’re quietly confident we can win in that marketplace”.

He acknowledges rail is less flexible because trucks can drive from point A to point B. Where rail needs an intermodal port. But where there’s a large haul, it becomes substantially more competitive and up to 16 times lower emissions.

“At a broad level, the railway line is that irreplaceable asset. Running through the centre of most of the centre of South Australia and Northern Territory, all the way to Darwin. You’re not going to get another one built beside it. The secret is to have a long term asset”.

“The economic challenge, though, is you don’t get to pick the day the projects are going that your customers are going to start their projects”.

“You have an asset, you run the asset well, and then, basically, as you’re as the projects come on stream, you can accumulate them into your asset, and it becomes more productive, and it becomes more valuable over time”.

That’s the part of the patience that rail demands.