The $5.98bn New Hope is understood to be among the suitors looking to buy Aurizon’s $1bn East Coast Rail business as it prospers from surging demand for coal.
It is understood that New Hope is bidding for the business as part of a consortium with Oaktree Capital Management and Canadian private equity firm Brookfield.
New Hope owns Queensland Bulk Handling, which is Brisbane’s dominant coal export terminal, along with the Bengalla thermal coal mine in NSW and the New Acland thermal coal mine in Queensland, among others.
Washington H. Soul Pattinson owns 39 per cent of the company.
While delivering a 1138 per cent increase in its annual net profit to $983m last month, New Hope said mergers and acquisitions aligned to its strategy were on the agenda.
The company now carries no debt and $715.7m of cash after the price of Newcastle thermal coal rallied about 60 per cent in the past year, and is returning funds to shareholders.
East Coast Rail was previously owned by rival coal miner Glencore, which remains a customer, and its contracts stipulate that the majority owner of the business cannot be a coal producer.
Glencore also has a veto right: if East Coast Rail is owned by a coal producer, it has the right to buy it back.
Should New Hope’s consortium emerge as the buyer of the business, it would be a minority shareholder.
Glencore sold its GRail business to Genesee & Wyoming for $1.14bn in 2016. That business was later sold to Macquarie and renamed One Rail Australia.
East Coast Rail was part of One Rail Australia, which Aurizon bought for $2.35bn this year.
New Hope probably thinks coal will be in the market longer than many expect, and that it can run East Coast Rail more efficiently than it is now.
There could also be synergies in owning its own infrastructure.
If Aurizon demerged the business, it would be unlikely to be highly valued because it is a coal miner.
However, it is likely to provide stable cash flows for years.
Most believe that New Hope is disciplined on price and will walk away if the deal does not make financial sense.
New Hope earlier explored an acquisition of BHP’s Mount Arthur thermal coal mine.
It currently has contracts with rival Pacific National and would need to honour those contracts if it acquired East Coast Rail.
Aurizon is expected to reach a decision in November or December on whether to sell or demerge the operation.
Brookfield, based in Canada, and Oaktree, based in California, are open to investing in coal-related assets.
East Coast Rail has been marketed as having opportunities to diversify away from coal into other markets, taking on Pacific National.
Aurizon is working on the sale of the business through Goldman Sachs. It’s a condition of approval of the One Rail purchase by the Australian Competition & Consumer Commission.
Ten parties have shown interest in East Coast Rail and Glencore is understood to have been among the bidders.
East Coast Rail has a steady income with 10-year regulated tariffs, servicing the needs of 40 mines. Thirty per cent of the volume hauled is thermal coal across NSW and Queensland.
It will carry about $500m of debt with a BBB- rating, including funds from the US private placement market.
For 2021, the unit generated $227m of revenue and $137m of underlying earnings and hauled close to 50 million tonnes.
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