Aurizon's largest shareholder, Perpetual, has called for the rail and infrastructure giant to shelve its planned $6 billion West Pilbara Iron ore Project after it pushed back the deadlines due to volatility in the iron ore price.
Aurizon said on Monday morning that following talks with the other partners in the project – Baosteel Resources and its subsidiary Aquila Resources, Korean steel giant POSCO and AMCI – it remains committed to the technical and commercial feasibility study stage for the project.
However, a number of new deadlines have been created to enable the project to better compete with other major Pilbara producers.
Perpetual, which owns a 6.28 per cent stake in Aurizon, said it does not believe the iron ore project can compete with its larger rivals.
"Management should be focused on delivering on cost out opportunities in the operating business, improving free cash flow and distributing this to shareholders," Perpetual's head of Australian equities Paul Skamvougeras said. "Aurizon's strong balance sheet gives the company flexibility to pursue genuine growth opportunities when they arise [but] the West Pilbara Iron ore Project is not one of them."
A decision on whether to proceed with a definitive feasibility study will be made by December 31, 2015 and will hinge on the level of costs which can be cut from the original estimate made in 2012 at the peak of the mining boom.
Aurizon said it expects a "significant reduction" in the budget given the subdued market for mining projects currently, but added it was mindful of volatility in the iron ore price.
If the feasibility study proceeds, Aurizon's period of exclusivity to develop an infrastructure solution for the project has been extended until April 30, 2016 and the timeframe for Aurizon to provide an "indicative and non-binding" port and rail tariff for the project has been pushed back a month to November 30.
A final investment decision on the West Pilbara project will be made by the end of 2016.
Deutsche analyst Cameron McDonald said the push back on timing made sense for Aurizon and was not unexpected.
"Given the volatility in the iron ore price, I think giving themselves some more time is what they need to be doing," said Mr McDonald. "It's still a lot of money to commit to a development."
CLSA analyst Scott Ryall said the move was a positive for Aurizon and backed up recent feedback about the project from joint venture partner Baosteel. Mr Ryall said the delay could also lead to Aurizon creating new capital management initiatives over the next 12 months.
Perpetual has previously called for Aurizon to hand capital to shareholders via a buyback and the company has indicated it will consider cash returns if both its West Pilbara and Galilee Basin coal projects are canned.
In August Aurizon chief executive Lance Hockridge said he was confident the rail giant can build a new deepwater port at Anketell Point and rail system in the West Pilbara for at least 20 per cent less than its $6 billion price tag. However, at its results in February Mr Hockridge said the economics of the project would be "very challenging" with iron ore at $US60 a tonne.
Iron ore for delivery to the Chinese port of Qingdao last traded at $US61.40 a tonne. The ore price has gyrated in recent months, gaining 31 per cent in the past six weeks from an April 2 low of $US47 a tonne; however, it is still 41 per cent lower than it was a year ago when iron ore traded at $US104 a tonne.
Aurizon won control of the greenfields West Pilbara iron ore project by teaming up with Chinese steel giant Baosteel to take over the project's majority shareholder,Aquila Resources in a $1.4 billion deal last year.
Aurizon shares rose 6c or 1.23 per cent to $4.92 in early afternoon trading on the Australian Securities Exchange.
Source: Sydney Morning Herald
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