Aurizon (AZJ) and Baosteel of China look like succeeding in their $1.4 billion joint bid for iron ore miner Aquila (AQA), despite yesterday’s shock news from Aurizon of further write downs, job losses and changes brought about the slide in the resource sector’s fortunes.
All up the costs of job cuts and write downs could top the half a billion dollar mark for the company by June 30, wiping out the year’s profit on an accounting basis.
It was the third announcement of cuts and impairment losses since last December by the rail operator, but despite that the company is pressing ahead for its iron ore play.
Baosteel and Aurizon are bidding $3.40 a share for Aquila and yesterday won acceptance from Aquila’s co-founder Charles Bass who owns 1.7% of Aquila.
With the more than 28% owned by Aquila chairman Tony Poli, also favouring the offer, Aurizon and Baosteel seem to be on the way to grabbing control. They will have more than 50% with other acceptances.
AZJ 1Y – Aurizon hits the brakes
But after the bad news of the higher write downs and other changes yesterday afternoon, Aurizon shareholders must be asking what’s the point of spending a dollar on a low value iron ore bid – especially given the slide in global iron ore prices and the rising level of oversupply.
Aquila’s iron ore reserves are low value magnetite ores which need a lot of processing, compared to the high quality ores in the Pilbara controlled by BHP and Rio Tinto which are in greater demand.
Given the weakening demand for Aurizon’s rail services from the coal industry on the East Coast in Queensland and NSW and the tougher environment in the WA iron ore sector, you’d be right in asking if the company should be tending to home first rather than on the Aquila play, especially after the surprise announcement yesterday afternoon.
That saw the shares ease 0.8% yesterday to $4.96.
That seems to be a modest result after yesterday’s news which saw Aurizon reveal it has stopped projects, cut more jobs and increased write downs by up to $160 million and warned of a "more subdued" outlook.
The company said two projects under development, Dudgeon Point and phase two of its Wiggins Island project (in Queensland), were "unlikely to progress" in the foreseeable future due to the slowdown in the resources sector.
The company will take pre-tax write downs of between $352 million and $382 million, including $222 million of previously announced impairments, for fiscal 2014.
That $222 million related to impairments announced last December, initially was estimated at up to $197 million, so obviously there was a significant over run.
Aurizon also announced a further 103 positions have been made redundant, largely at the head office, in addition to cuts announced in May.
Those May cuts saw up to 350 jobs slated to go at the company’s heavy maintenance depots near Ipswich (2014) and at Townsville (2015).
Yesterday it revealed extra asset impairments and additional provisions for voluntary redundancy costs in the range of $130 million to $160 million before tax.
After the first half cuts of $22 million, Aurizon now expects total impairments for the full year between $352 million and $382 million, before tax.
All up the losses from the redundancies and the impairments could top a massive $540 million.
The impairments reflect the company’s best assessment of the current and short-term outlook for the domestic and global coal markets, as well as a further review of strategic assets, Aurizon said in the statement
Chief executive Lance Hockridge said the impairments are a response to an in-depth review of the market outlook."While that outlook for the resources sector is still very attractive, it is clearly more subdued," Mr Hockridge said.
The company made no comment on the trading results for the 2013-14 year, except to say, "Since the release of our most recent throughput numbers overall tonnages shipped have remained strong, and we expect to finish the year within the previously advised coal tonnage guidance levels of 207mt – 212mt. On 12 June 2014 the Central Queensland Coal Network passed for the first time the milestone of 200mt coal shipments in a financial year’’.
But no estimates of revenues or the impact of the cuts and weakening outlook on earnings were given yesterday.
"We note that, pending resolution of UT4 interim arrangements with CQCN customers, the revenue benefits of over-estimated tonnes will be returned to customers in the current year under the Transitional Tariff arrangements, rather than two years later, as is the usual arrangement under the Maximum Allowable Revenue framework” the company said.
The latter means the company could be forced to return overpayments in 2013-14 instead of 2015-16. Depending on the amounts, that could further cut profits and especially cash flows for the company.
