BREAKFAST DEALS: Iron roadblock

Small iron ore producers are stuck at stage one of a study into their own rail line, while D-day approaches for Sundance and Hanlong.

The smaller iron ore miners in the Pilbara are forging ahead with their study into an ambitious rail line with Aurizon that would break their reliance on the big players. The question mark, as always, is the price of their product. Speaking of iron ore, Fortescue is close to its own infrastructure deal, while Sundance Resources will soon be kissing its takeover offer goodbye. Meanwhile, Virgin Australia wants conditions lifted on its Air New Zealand alliance.

Aurizon, Atlas Iron, Brockman Mining

The first stage of the study into a rail line for smaller iron ore operators in the Pilbara, run by haulage giant Aurizon, has been completed and there’s one obvious takeaway for interested onlookers.

Atlas Iron and Brockman Resources certainly haven’t given up on the idea – indeed, they’re still thrilled at the prospect of getting their own infrastructure and lowering their cost base. But they can’t charge ahead with it either.

The lower-rung iron ore players announced late on Friday that the first phase of the study had been completed. An extension of the study until July 1 has been agreed upon to investigate “the integration” of the rail line and the development at Port Hedland. In essence, they haven’t stopped looking at it, but they haven’t really started doing anything about it.

“As a result of this first phase of study, Atlas has learnt much about the economics of a new independent rail solution, and for that matter the part independent infrastructure options have to play in the broader Pilbara landscape,” said managing director Ken Brinsden.

“The results of the joint study support our view that an infrastructure solution for junior miners in the Pilbara is viable and could be realised, to the benefit of all of our stakeholders, including the local Port Hedland community and the state of Western Australia."

By July 1, Atlas, Brockman and Aurizon will have been studying this proposal for 14 months.

When the mouth-watering study for junior operators who were tired of being subservient to the big three in the Pilbara was first announced, iron ore prices were around $US140 a tonne. They promptly took a dive as the iron ore market was flushed with free supply from players like Australia’s BHP Billiton, Rio Tinto and Fortescue Metals Group, along with Brazil’s Vale, without a necessary pick-up in demand from China to maintain prices.

Iron ore has since recovered to the pre-dip levels, but the proposal hangs not just on the prospect of cost savings for the smaller producers, but the price of their product.

Bloomberg recently surveyed industry analysts who concluded that the seaborne iron ore market will swing to a surplus next year and that surplus will expand each year until 2018. The result is a price forecast of $US70 per tonne.

That sounds like a killer for this project, cost savings aside. If Fortescue is vulnerable at $US100 a tonne, it’s hard to see even a coalition of smaller operators competing at $US70 a tonne. Only the big boys play with those numbers.

Aurizon is facing the same balancing act with the proposed deal with India’s GVK Hancock, part-owned by Australian billionaire Gina Rinehart, to build a $6 billion tail line for Queensland’s Galilee Basin that would end at Abbot Point.

Rather than it being a question about the iron ore price, it’s a question about the thermal coal price, which has also taken a dive recently.

Then again, the iron ore analysts are looking towards 2018, after which point all bets are probably off about the iron ore price. A Pilbara rail for the little guy wouldn’t be completed for several years.

But what would the little guy do in the meantime?

Speaking of iron ore infrastructure, Fortescue Metals Group boss Nev Power reportedly says the infrastructure stake sale process is on track to be completed by mid-year.

According to Fairfax, Power said at a conference in Hainan, China the Pilbara player had found strong interest in its rail and port assets, housed in The Pilbara Infrastructure, where it’s looking for a minority shareholder.

“By mid-year we will get the process completed,” said Power

Sundance Resources, Sichuan Hanlong Mining

Just briefly while we’re talking iron ore deals, today is the day Sundance Resources expects to finalise and document the outcome of the 'good faith' talks with suitor Sichuan Hanlong Mining over the scheme of arrangement for the $1.3 billion takeover offer.

Sundance has been in a trading halt since March 20 after the troubled takeover offer went from very bad to worse.

The African-focused iron ore miner is in a trading suspension until tomorrow when it’s expected to finally call an end to the bid that is now over 18 months old.

Virgin Australia, Air New Zealand

Competition tsar Rod Sims must feel at times like he’s playing whack-a-mole when it comes to the Australian aviation market. Every time he appears to have one airline’s regional competition dealt with, the other one pops up.

Virgin Australia and Air New Zealand have asked the Australian Competition and Consumer Commission to lift the capacity flaw restriction on their trans-Tasman alliance. The pair added that if the partnership isn’t reauthorised by the end of the year, they will “immediately unwind” it.

Air New Zealand owns a 19.9 per cent stake in Virgin Australia.

The condition is part of a request for a five-year extension on the agreement that expires in December.

That five years would more or less coincide with the alliance that major rival Qantas Airways has just signed with Emirates, officially launched a week ago, which also included minimum capacity clauses for the trans-Tasman route.

Virgin says without the alliance it can’t match Qantas in terms of schedule frequency, frequent flyer points or lounge facilities. Virgin is taking on Qantas in New Zealand in the corporate travel stakes.

The low-cost rival argues that the minimum traffic condition should be dropped from its own agreement, but maintained for Qantas and Emirates.

Virgin is also agitating the ACCC to ease up on the conditions with its 60 per cent stake purchase of Tiger Australia, threatening there too that without compelling conditions, it will tear up the agreement.

Billabong International

There are a few more details that have spilled out from Billabong International, which remained in talks with its two consortium bidders over the weekend.

The problem for chairman Ian Pollard and his board appears to be not just that the highest offer was reportedly 60 cents a share, well down on the indicative bids of $1.10 a share, but they also remained highly conditional.

Last month, rival surfwear company Rip Curl pulled plans for a $400 million sale, with founder Brian Singer describing the market as a “cesspit”.

Billabong is getting a nasty whiff at the moment.

Wrapping up

Explosives maker Orica chief executive Ian Smith is reportedly looking at land sales in Melbourne’s Deer Park to unlock up to $100 million as part of his restructuring efforts.

The Australian Financial Review understands that the plan is medium term, though a company spokesperson declined to comment on the story.

And finally, the federal government has offloaded $600 million in bonds dated January 21, 2018. The coverage ratio was 3.91 per cent for an average yield of 3.0173 per cent.

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