It would appear reasonable to assume that the timing of Brockman Mining’s decision to seek access to Fortescue Metals’ Pilbara rail infrastructure isn’t a coincidence.
Fortescue is in the final stages of negotiations to sell a large minority stake in its rail and port assets to a third party investor for more than $US3 billion. The Brockman move could severely complicate those negotiations and assessment of the value of the equity being offered.
The Hong Kong-listed Brockman has lodged an application under the Western Australia Railways (Access) Code to gain access to the below-rail infrastructure owned by Fortescue subsidiary The Pilbara Infrastructure.
The code was put in place by the West Australian government in 2000 but the Brockman application is the first attempt to use it to get access to Pilbara rail infrastructure – Fortescue itself has previously used, unsuccessfully, the federal Trade Practices Act to try to get access to Rio Tinto and BHP rail lines.
TPI is itself a signatory to the WA code, meaning it has undertaken to provide access to third parties and, indeed, has said in the past that it would. The Brockman application would trigger a process that is primarily about the terms of that access.
The problem for Fortescue and its proposed sale of equity in TPI is that the value of TPI was seen to be driven by the price Fortescue itself would pay to ship its ore on the rail line and through the port facilities – the higher that price the bigger the price it would receive for the equity.
If Brockman is granted access it would be on terms set by the WA regulators after an evaluation of TPI’s costs and its cost of capital – the regulated price for Brockman might be quite different to that which Fortescue had agreed to pay to TPI to underwrite the value of the equity it is offering. That would inevitably impact the value of TPI, which creates considerable uncertainty just as Fortescue has reached the pointy end of its negotiations.
Brockman has been negotiating with Fortescue for a commercial agreement that would give it access to the TPI line for some time but failed to reach a mutually acceptable deal, presumably because Fortescue was holding out for too steep a price. The use of the WA code could give Brockman more leverage to get Fortescue back to the table to negotiate commercially rather than leave its fate in the hands of the regulator.
If Brockman were granted access to the line by the regulator on terms it found acceptable it could impact not just the value of TPI, but Fortescue’s own expansion plans.
TPI has been expanding its capacity in line with Fortescue’s current plan to increase its production to 155 million tonnes of iron ore a year but Fortescue has indicated that it has a longer term ambition to increase its production even more.
Brockman wants to ship up to 20 million tonnes a year from its Marillana project to Port Hedland. It argues that as Fortescue has allocated capacity of only 120 Mpta at Port Hedland there should be spare capacity on the line. Fortescue could also be directed by the regulator to expand the capacity on the line to accommodate third parties if the capacity proved insufficient.
Brockman is asking for "below rail" access, which would give it the ability to operate its own rail operations – its own "above-rail" equipment – on Fortescue’s track. It has been talking to a number of operators about their interest in providing the above-rail services (Aurizon is the most obvious) and in funding the spur lines that would connect Brockman’s resources to the Fortescue line. That’s very different to the agreement Fortescue has with BC Iron to haul its ore for a fee.
While Brockman has sought access to the TPI infrastructure it is also pursuing another option. With Aurizon and Atlas Iron (which has also been trying to negotiate access to the TPI line with Fortescue) it has been looking at building a new rail line to link the junior east Pilbara miners’ projects to a proposed new facility at Port Hedland.
In effect Brockman is looking for third parties to fund the construction and operation of the infrastructure required to bring Marillana into production. Without access to that infrastructure the resource would be stranded.
It has also been talking to potential Chinese partners about selling equity in Marillana to help finance its development, but unless and until it has secured access to, or built, a rail line and port facilities it is unlikely that anyone would place much value on equity in a project that might not be developed.
While Brockman says the study of the independent rail line option with Aurizon and Atlas is being progressed into a pre-feasibility study for integrated rail and port solution, the economics of building new infrastructure relative to gaining regulated access to existing infrastructure would presumably be challenging, particularly given the much lower iron ore price environment in which aspiring producers are now operating.