Pilbara stars align for Brockman and Aurizon

Brockman, as well as other juniors, needs to get its ore to the sea while Aurizon wants a piece of the Pilbara pie. But their partnership is not yet a given.

The binding "relationship agreement" iron ore junior Brockman Australia has signed with Aurizon is a clear signal of Aurizon’s commitment to building a presence in the Pilbara. But it doesn’t provide any particular guidance as to how that might occur.

Under the agreement all the options under which Brockman might get access to rail and port infrastructure for its Marillana and Ophthalmia iron ore projects remain open.

It could, with Aurizon and Atlas Iron and perhaps some funding from China’s Tianjin Port Group, build an entirely new set of rail and port assets that Aurizon would largely fund and operate.

Alternatively, the new partners could engage with a third party building a new rail line.

Or, having applied under Western Australia’s access code to get below-rail access to Fortescue’s Pilbara rail line, Aurizon could build the spurs and provide and operate the rolling stock to ship Brockman’s ore to proposed new port facilities at Port Hedland.

The agreement, regardless of which option is eventually pursued, pivots around Aurizon and its ability to help fund and to operate the infrastructure and rolling stock involved.

Aurizon made it clear even before the former QR National was floated in 2010 that it wanted to build on a fledgling presence in the Pilbara to reduce its reliance on Queensland coal and the agreement with Brockman creates the potential for it to realise its ambition.

A key issue will be whether Brockman is successful in getting access to Fortescue’s line on acceptable terms.

Brockman sought access under the WA code in May, the first attempt to use the code to get access to existing Pilbara rail infrastructure. Rio Tinto and BHP Billiton’s Pilbara infrastructure isn’t covered by the code.

Fortescue’s infrastructure sits within a subsidiary, The Pilbara Infrastructure Pty Ltd. Complicating matters is that Fortescue has had a long-running sales process for a minority interest in TPI, with the deadline for a deal, if there is to be one, recently pushed into the September quarter.

With the iron ore price remaining somewhat higher than might have been anticipated and Fortescue’s cash costs somewhat lower than expected the surge in the group’s free cash flows and in its ability to pay down its potentially destabilising $10 billion of net debt ahead of schedule has taken some of the pressure off a sale of equity in TPI.

Any investor in TPI would probably want Fortescue to allow third party access to the line to boost volume and returns, which could impact the efficiency and flexibility of Fortescue’s own operations.

Under the access code Fortescue was required to supply Brockman with proposed floor and ceiling prices for access to its line and the costing principles which generated those prices. It came up with a range of between $73.4 million and $575.6 million a year, which suggests Fortescue is less than enamoured at Brockman’s attempt to force it to provide access.

With Brockman looking to ship around 20 million tonnes a year on the TPI line using rolling stock provided and operated by Aurizon, the concept is quite different and far more disruptive to Fortescue’s own operations than the simple haulage deal it has with another junior, BC Iron. It could take some time, and perhaps some protracted litigation, before the issue is resolved.

Building a completely new set of rail infrastructure and the port facilities required would obviously involve far more capital – probably pushing into the high single digit billions – although the deal with Aurizon and a memorandum of understanding Brockman has with Tianjin Port Group provides the outline of a core of third party funding.

One assumes that getting access to Fortescue’s existing rail line would be a more economic proposition for Brockman than haulage costs that reflect the investment in entirely new infrastructure but it is possible that developing new east Pilbara rail infrastructure would bring other juniors like FerrAus and Flinders Mines into the frame, and perhaps even Gina Rinehart’s big Roy Hill project.

Brockman and the other juniors have deposits of iron ore that will be stranded without access to a rail line and port.

Moreover, Brockman needs to secure that access in order to sell equity in Marillana to help fund its development.

It has been talking to Chinese investors but, with billions of dollars of boom-era Chinese investment in now-stranded WA iron ore deposits, prospective investors would want to be sure that Brockman can get its ore to port. It is edging closer to securing a haulage solution.