Aurizon renegotiates iron ore contracts as mines try to stay open

Aurizon is considering renegotiating contracts with iron ore customers to ease the pain of record-low commodity prices, as some Western Australian mines struggle to stay open.

"Due to challenging current trading conditions from record-low commodity prices, Aurizon is in active discussions with a small number of non-coal customers regarding potential near-term contractual relief in exchange for contract extensions and other longer-term security to Aurizon," the rail group said on Thursday.

Aurizon chief executive Lance Hockridge has a tough year ahead.
Aurizon chief executive Lance Hockridge has a tough year ahead.  Photo: Robert Shakespeare

Aurizon's shares, which are trading at their lowest levels since late 2012 on concerns over the company's earnings outlook, fell 1¢ to $3.73.

The company is asking some customers, including iron ore miners, to extend their contracts in return for renegotiating the terms of their existing agreements.

Aurizon's iron ore customers include WA's Karara Mining, which has warned it may not be able to keep operating following the slump in iron ore prices.

Income from iron ore haulage accounts for about 9 per cent of Aurizon's group earnings before interest and taxation (EBIT). Its biggest iron ore customer, Cliffs Natural Resources, is also "high risk" due to its costly operations, according to RBC Capital Markets.

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Tumbling commodity prices have already forced the collapse of some of Aurizon's customers.

Freight volumes fall

The company is working with the administrators of Clive Palmer's Queensland Nickel, which went into voluntary administration on January 18, to try and recover some $20 million owed debt. Aurizon shifts nickel from the refinery to the Port of Townsville.

Aurizon's freight volumes fell 10 per cent in the three months ended December 31, to 10.6 million tonnes, mostly because of an 8 per cent drop in bulk-haulage volumes as it moved less nickel and alumina, and demand for port shuttle services fell.

But iron ore volumes rose 2 per cent to 6.2 million tonnes.

Queensland coal haulage volumes fell 8 per cent in the quarter to 40.3 million tonnes as Aurizon's key customer, the BHP Mitsubishi Alliance, hauled more of its own coal. Volumes were also hurt by "production issues" at a major customer's mine, Aurizon said.

NSW coal volumes rose 6 per cent during the quarter to 11.5 million tonnes.

More than $2 billion has been wiped off Aurizon's market capitalisation since December, when the company outlined as much as $240 million in asset write-downs and said first-half underlying EBIT would be between $390 million and $410 million. Analysts had expected about $500 million of EBIT.

Aurizon also said in December that annual coal haulage volumes would be lower than forecast, revising its financial 2016 guidance down to between 202 million and 212 million tonnes. It had previously forecast that volumes would be as high as 220 million tonnes.