Newman has bet each way on QR National
THE Queensland Premier, Campbell Newman, is not much of a punter - certainly when it comes to placing odds on whether the state's largest investment in the coalmining industry - QR National - will be a winner.
Newman could have retained the government's 34 per cent state in the railway that provides the backbone to transport Queensland's coal exports. Alternatively he could have taken the proceeds and put the money in the state Treasury coffers.
Instead the government has taken a bet each way and sold roughly half.
If Newman and his offsider, Treasurer Tim Nicholls, took the view that there was plenty of growth left in QR National and that the taxpayers of their state would be the beneficiaries of it, then why sell it?
The first point is that the government argues that the shares had been borrowed against by the previous Bligh regime.
Nicholls said yesterday that interest costs on the debt exceeded the contribution from QR National's dividends. But that isn't an iron-clad reason to sell an asset that is appreciating in value.
The second possibility is that Newman said in his electioneering that QR National would be sold - an undertaking that was made possible in August when the government's 34 per cent was released from escrow.
The $1.5 billion proceeds allows the government this each-way bet. If the mining boom does continue to slow as it has over the past couple of months the decision not to sell the lot is one that Newman's government may live to regret.
The trouble is that neither Newman, the QR National management nor the investors that will buy the stock have any idea how the resources industry will look even in a couple of months.
Under the terms of the deal that has been proposed, QR National will spend $1 billion buying two-thirds of the shares the government is selling and one-third will be placed to institutional investors - all at a price of $3.47 a share.
The rationale is the stock QR National acquires will be cancelled and the earnings on the remaining shares will be greater - even though the company will need to borrow and pay interest to buy its own stock.
The QR National board takes the view the deal will be earnings per share accretive and even after spending $1 billion on its own stock will not be over-geared.
The company is still bargaining on the fact that the investments it has already announced in increasing the capacity of its railway systems will provide a healthy improvement in revenue and the various cost-cutting measures it has undertaken will be enough to improve the bottom-line profit.
Since the bulk of QR National was privatised a few years back 70 million tonnes of extra capacity either has been added or is in the pipeline to be complete by 2015.
According to the plan on the drawing board another 75 million tonnes of coal will be carried three years later.
Its chief executive, Lance Hockridge, reckons these are not pie-in-the-sky projections - rather they are achievable using conservative industry measures.
But it must be said that the fall in the price of Australia's major mineral export commodities has been radical over the past couple of months and predictions about where to next are wildly varied.
In the past month alone there have already been many mining infrastructure projects previously on the drawing board that have been canned or put on ice pending some clarity about growth in China.
For example, a few months ago QR National was talking up the prospect of building a new rail corridor in the Pilbara in a joint venture with two iron ore miners, Atlas and Brockman, to connect stranded assets to a coastal port.
With the fall in the iron ore price - which is now hovering around $US104 a tonne - this looks like one of those pie-in-the-sky plans.
In February, QR National also talked about a number of east coast coal-expansion ideas that would increase volumes to 900 million tonnes. The majority of these will be aspirational rather than realistic in today's environment.
Hockridge is now operating in a very different one in which he has to keep his investors convinced that the projects that are approved and under way can improve volumes profitably.
Despite the cloudy prospects for the mining industry - which at QR National's full-year result briefing resulted in a recognition that ''a softer environment for coal haulage services would continue in the short term'' - the investment market was clearly pleased by yesterday's announcement that the Queensland government was selling part of its stake.
The stock moved up 5 per cent on the back of the announcement.
As a general rule investors don't like shares in the hands of would-be sellers - nor do they like having governments as cornerstone investors. It produces a supply overhang.
The market would have preferred the government to have sold its entire stake and will now be waiting for that to happen.
This is despite the fact that the government said it had no present intention to sell the remainder.