BREAKFAST DEALS: Coal crunch

Aurizon and GVK Hancock have some big dreams for the Galille Basin, but they all rest on the price of coal, which is not so big at the moment. Meanwhile, an analyst has put some big numbers on potential asset sales from BHP Billiton and Rio Tinto over the next three years. Elsewhere, a rival suitor for Elders’ sandalwood assets has spurned the ‘shotgun wedding’ with Santanol, while the purchase of Inghams Entreprises looks pretty straight up and down for TPG Capital.

Aurizon, GVK Hancock

The biggest question hanging over the proposed deal between Aurizon, formerly QR National, and India’s GVK Hancock to build a $6 billion rail line from the Queensland’s Galilee Basin to Abbot Point, is the price of coal.

There’s no doubt that GVK Hancock, part owned by Australian billionaire Gina Rinehart, is sitting on a lot of coal. The agreement is to construct a rail line and port that will have a capacity of up to 60 million tonnes of coal annually.

To put that into perspective the new agreement that the coal haulage company signed with BHP Billiton, along with its Japanese partners Mitsubishi and Mitsui last week, that so put a smile on the face of chief executive Lance Hockridge, was for 65 million tonnes.

Thermal coal prices need to be around $US120 a tonne to make the Galilee Basin viable. As of last night they were below $US92, down for the fourth straight week.

“The proposed relationship with Aurizon would allow us to jointly develop the most cost and time efficient rail and port solution for the Galilee Basin,” said GVK vice chairman G V Sanjay Reddy.

Aurizon would buy a 51 per cent stake in Hancock Coal Infrastructure for an undisclosed amount under the proposal.

Questions about the thermal coal price need to take into account that this deal isn’t officially done yet. Aurizon said it would give further details to the market when this proposal becomes something more concrete.

While Breakfast Deals is sure the two companies are fair dinkum about this idea, these infrastructure agreements aren’t birthed into existence with ease.

When still called QR National, the haulage company announced a feasibility study into a Pilbara rail line for smaller operators like partners Brockman Mining and Atlas Iron.

That was back in April 2012. Hockridge has since said he remains committed to the idea, but the question is 'at what level'. It should be pointed out that prices have since recovered.

Which brings us to the second point. We still don’t know when this still hypothetical port and rail project would be up and running. Thermal coal prices could be a very different story by then.

And while we’re on the coal price, there’s another hearing scheduled today for major Whitehaven Coal shareholder Nathan Tinkler as his solicitor tries to protect him from questions from the liquidators of Mulsanne Resources.

In contrast to Aurizon and GVK, Tinkler badly needs a rebound in the coal price in the short term. His 19.4 per cent stake in Whitehaven is now worth just $500 million against widely reported liabilities of $700 million.

BHP Billiton, Rio Tinto

News that BHP Billiton is understood to have at least 10 assets on the table, including some in its gas and oil assets, has been coupled by Deutsche Bank analyst Paul Young's indication that BHP has $US25 billion in assets that it could flog over the next three years.

As for rival Rio Tinto, up to $US10 billion in assets could be put on the chopping block.

“Within these are a number of hidden gems not being valued by the market,” wrote Young.

Before you bite down into those tasty headline numbers the timeframe, like in the Aurizon deal, is important. While resource companies invest in the decades, three years is a long time to ‘um and ah’ about asset sales.

But, to put that number into context, BHP has generated about $US4.5 billion from its stake in Woodside Petroleum’s Browse Basin, the Ekati diamond mine in Canada, a mineral sands project in South Africa and the Yeelirrie uranium project. So while it’s a long time for BHP to think, there’s also a lot to cut.

At BHP, Young reckons the non-core oil assets in countries like Pakistan and Algeria could be offloaded, along with Alumar and thermal coal assets. Unsurprisingly, the Nickel West business is also a likely candidate.

And at Rio there’s the logical ones like Pacific Aluminium and its diamond assets, but Young also nominates the Eagle Nickel mine in the US state of Michigan and Rio’s Canadian iron ore assets.

While we’re talking big resources companies, Leighton Holdings subsidiary Thiess has picked up $212 million worth of work on Chevron’s Gorgon LNG project in Western Australia.

Elders, Santanol

Investment firm Hamilton Securities has reportedly compared the sale of Elders sandalwood assets in Western Australia to Santanol to a "shotgun wedding”.

According to AAP, Hamilton Securities executive director Giles Craig made the comments as his firm looks to put its own proposal forward, which isn’t ready yet.

“All we can do is say: if you (the growers) want to accept the bird in the hand (the Santanol offer), then do so, but recognise it is a very small bird,” he said.

Santanol is reportedly handing over $70 million for the Ord River tree assets.

Queensland privatisations

Former treasurer Peter Costello is reportedly set to launch a new private advisory service for Mills Oakley Lawyers later this week as an interesting subplot to the Queensland state government privatisation debate develops.

According to Fairfax, Costello will be a guest speaker for the firm at a launch on Thursday. The speech will come as he faces questions about the relationship between his firm ECG Advisory Solutions and his position as chairman of Queensland’s Commission of Audit.

The Commission recently handed to Premier Campbell Newman its recommendations for how to correct the state’s finances, with the top idea of the 1000-page report to offload the state’s energy distribution businesses Energex and Ergon Energy.

The thing is, Costello has been listed as a lobbyist for certain firms that could conceivably benefit from certain recommendations.

ECG put out a statement saying that the relationships with these firms ended before Costello was appointed to the commission.

Besides, Newman has expressed hesitance at the idea of selling off assets and says nothing will be done before the next election in 2015. ‘Can do’ Campbell wants a mandate for something like that – his 75 of a possible 89 seats in the Queensland parliament apparently not enough.

Investment bankers hoping for a slice of a Queensland privatisation drive shouldn’t worry about the Costello subplot, but nor should they be hoping for action either this year or next.

Wrapping up

More details about the $880 billion sale of the Inghams Enterprises chicken business to private equity firm TPG Capital are emerging.

The Australian reports that the existing strategy by management will be kept in place, with no plans for a company restructure in the near-term. Meanwhile, The Australian Financial Review reports that the banks financing the deal are Macquarie Group, ANZ Banking Group, National Australia Bank, Westpac Bank, Nomura, Bank of America Merrill Lynch and HSBC.

And finally, Mark Bouris’s TZ Limited has done a deal with AA Holdings (which owns more than 50 BP service stations) and Australian Fuel Distributors to install lockers in over 130 petrol stations and convenience stores.

This is part of a push to take advantage of the online retailing boom. Customers would be able to pick up their parcels from a locker, rather than miss a delivery destined for their house while they’re at work. Almost six months ago, TZ won an important handshake from Singapore Post.