Light rail offers a new iron hope

Summary: The Mineral Resources takeover bid of Atlas Iron could be the beginning of waking up a dormant sector of the market, and also the beginnings of a new light-rail system.

Key take-out: The Bulk-Ore Shuttle System could be the solution for the proposed expansion of Mineral Resources (ASX: MIN).

The proposed takeover of financially-stretched Atlas Iron can be seen as the final act in a long clean-up process.

But it can also be seen as the start of a revival process that could wake a dormant sector of the market––Western Australia's small iron ore stocks.

In isolation the deal is a simple proposal from Mineral Resources, a miner and technical services provider valued on the stock market at $3 billion. The deal is to acquire the $260 million Atlas through a one-for-571 share swap.

The terms of the offer highlight the disparity between the two companies with Mineral Resources shares selling for around $16.44 and Atlas limping along at 2.6 cents, a price dictated by it having issued 9.3 billion shares, many to creditors as part of a 2015 financial rescue package.

But these terms and the difference in size masks the importance of Atlas to Mineral Resources, and what could evolve if the two companies do merge.

A merger for port access

Atlas, while an exporter of around 9 million tonnes of iron ore a year from its mines in the Pilbara, has an asset which is potentially of greater value than ore in the ground. It has an under-utilised allocation of capacity at Port Hedland, Australia's biggest iron ore port.

Mineral Resources wants increased port access for its own iron ore, and for the new business of exporting lithium.

By resolving the first-stage of the port-access issue Mineral Resources could move on to the next stages of its plan, building a light railway system to replace the trucks currently used at its mines and those of Atlas, as well as selling access to other small miners with isolated deposits of iron ore.

Even further into the future is the potential for small miners, currently prevented from exporting by a lack of rail and port services, for a new berth at Port Hedland dedicated to their ore.

A larger picture

It is a big plan which has been a long time coming. It's also a plan which has echoes of the great railway-access fight of 15 years ago when Fortescue Metal Group (FMG) demanded, but was refused, access to the rail and port systems operated by Rio Tinto and BHP.

FMG's solution, which has worked brilliantly after a few hiccups, was to build its own heavy-haul railway and associated port.

Mineral Resources, in general terms, is following the FMG playbook. It has ore (iron and lithium) but to grow it needs more port access and a transport solution which is more efficient and cheaper than trucking.

A solution could be BOSS, the short name for a Bulk-Ore Shuttle System, a light-rail dedicated to hauling iron ore from existing projects as well as having the potential to be run quickly and cheaply to isolated pockets of high-grade ore controlled by Mineral Resources at Atlas or by other companies.

Proposed several years ago, BOSS was initially named BOTS (Bulk-Ore Transport System) though the name change has not altered the underlying technology which has been likened to a monorail, except its not with trains travelling on two rails along a relatively narrow-gauge track.

Everything about BOSS is smaller, lighter and more flexible than the heavy-haul rail systems operated by other miners in the Pilbara.

Nothing new in light rail

Sydney is in the process of installing a commuter version of one through its central business district and in the resources sector there is the light rail used in Queensland's sugar industry. The trams of Melbourne and Adelaide can also be seen as a form of light rail.

Mineral Resources in its presentations claims BOSS would be 75 per cent cheaper to install compared with heavy haul rail, with operating costs substantially less than trucking ore.

The system would also differ in that each ore car would have its own electric motor rather than the heavy diesel engines on existing railways. Track, according to Mineral Resources, would be easy to lay, even through the less hospitable parts of the Pilbara.

Unknown at this stage, is what a BOSS system would cost, when one might be installed and whether it can hit the targets laid down by Mineral Resources.

Arguments against BOSS working as promised include the harsh climate and topography of the Pilbara, especially in the summer wet season when rivers are in flood and temperatures extremely high.

Mineral Resources, which has an enviable track record of mining and engineering success, is confident that all obstacles can be overcome and if they are then a new, lighter version of iron ore mining in the Pilbara might evolve.

And if that happens then the small iron ore stocks which were once closely followed by investors could blossom, assuming they can negotiate access terms.