China’s continuing ban on Australian coal seems to have missed rail freight company Aurizon which yesterday reaffirmed full year guidance of earnings before interest and tax (EBIT) of between $870 million and $910 million at its investor day in Newcastle.
The company said supportive debt markets were enabling the maturity profile of the company’s debt to be extended which means locking in lower interest costs for longer periods of time.
The company is heavily reliant on the coal industry. Nearly 70% of its rail revenue comes from transporting metallurgical coal and thermal coal, and the rest come from transporting bulk goods.
Investors however didn’t take to the update and the shares finished steady at $3.77, well under the year high of $4.06 back in mid-February.
In its investor briefing, the company revealed three different scenarios for investors that each would deliver an average free cash flow of between $500 million and $650 million until 2040.
Aurizon wants as much as 25% market share of the bulk goods transport market within 10 years, which would deliver EBIT of between $250 million and $300 million and reduce the importance of thermal coal in its revenue mix.
For coal, Aurizon see’s Australia’s export volumes either staying above 500 million tonnes (mt) until 2040, or falling to around 300 million in a ‘carbon constrained Asia’ scenario.
This higher level requires no new climate change policies to be implemented, no constrains on Australian ports, and strong economic growth in Asia.
The 300 million tonne level will eventuate if there was lower economic growth in Asia, if China becomes self-sufficient in thermal coal from 2032, and if coal-fired power plants were closed in favour of renewables.
But coal exports could fall below 200 million tonnes a year in a ‘rapid decarbonisation’ scenario that sees complete closure world wide of coal-fired electricity plants by 2032, and hydrogen-based steel production.
Aurizon said it would adjust investment accordingly to maintain the annual free cash flow of at least $500 million
The company told investors it saw the opportunity for the bulk business (all above rail haulage, except coal) “to target new markets as it expands across supply chains, including port and terminal services, and taps into growing demands for inputs to renewables and batteries, infrastructure development and global food consumption.”
“Realising this growth opportunity would change the commodity mix for coal and non-coal revenue in the Aurizon portfolio, the company said.
Aurizon’s transformation, productivity initiatives and cost reduction “will remain key drivers for the Company’s financial and operational performance” (ie cost cuts and restructurings are to continue indefinitely).
And according to CEO Andrew Harding:
“Our strategic aim is to ensure Aurizon’s core business is highly efficient and resilient in a changing market environment, while enabling the continuing growth of our Bulk business. With the re-balancing of our portfolio mix , Aurizon remains well-positioned to support shareholder returns and re-investment in the business.”
