According to The Australian Financial Review today, Glencore has opened discussions about the sale of its highly strategic Hunter Valley train business in a move that could profoundly reshape the competitive framework of the national coal export chain.
Glencore, which is Australia's biggest thermal coal producer and which draws slightly more than half of its 98 million tonnes of annual production from its Hunter Valley mine complex, got into the train business back in 2010.
The reality back then was that the Queensland and NSW coal chains were dominated separately by former government-owned freight operators that owned a legacy of inefficiency that had created a deeply toxic relationship between the coal miners and their logistics providers.
As a result Glencore pumped $350 million into the acquisition of nine train consists (GTrain) and the infrastructure needed to sustain a coal freight that has capacity to carry about 40 million tonnes a year from the company's seven mining complexes across the Hunter to export terminals at Newcastle port.
Glencore is said to be seeking interest in a price range above $800 million and hopes it can generate competitive interest enough to earn itself a $1 billion payday in a sale that is slated to be finalised by the third quarter of this year.
It must be said that, on the surface at least, that price range seems a wee bit hard to justify.
The standard freight charges across the coal sector run at between $4.50 and $5 a tonne and the two big operators, Aurizon and Pacific National, generate margins of 30 per cent and 25 per cent respectively from their coal contracts. So if we do the maths based on the norm, then the GTrain would throw off revenue of no more than $200 million and generate EBITDA of something orbiting $60 million. If we run an average industry multiple of maybe eight over that we get to $480 million before accounting for the particular strategic value that this business represents for existing operators and other potential investors.
The billion dollar question here is who might turn up to the auction Glencore wants to generate? There are, of course, two obvious candidates in the form of the aforementioned competitors, Aurizon and Pacific National. But there appears to be one other natural owner for this business.
While Glencore owns GTrain it does not actually drive, direct or maintain the fleet. That task was outsourced back in 2010 to the nascent local offshoot of a British-based bulk train operator called Freightliner. The service contract is five years into its 10-year term. And, doubtless it carries a change-of-control trigger that would see a new owner of GTrain offered the opportunity to change tack.
About nine months ago, Freightliner was acquired in a $US750 million deal by none other than America's increasingly global train giant Genesee & Wyoming.
Genesee & Wyoming has had eyes on building a beachhead in the Australian bulk freight business for better than half a decade. It owns and operates the Adelaide to Darwin rail link, running container and bulk freight as well as the Ghan passenger business up its line. But Genesee & Wyoming's efforts to get anywhere in east coal have, so far, come to dust.
In a perfect Glencore world then, Genesee & Wyoming might be persuaded that its moment for traction has arrived. Because if Glencore can introduce the potential of a third force entering the enriching backyard of the existing Hunter freight duopoly then its $1 billion target might be more achievable than the underlying number might imply.
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