Fortescue off track with rail access

Junior miners complain to the neutral umpire over unrealistic access costs

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published June 28, 2013 1:13 pm AEST

Junior iron ore miners are up in arms over Fortescue Metals Group's (ASX:FMG) proposed costs to use its rail infrastructure.

Fortescue's infrastructure arm, The Pilbara Infrastructure Pty Ltd (TPI), has put forward a proposed cost structure to use its rail network ranging from a low of $73 million to $576 million a year.

Brockman Mining and Flinders Mines Limited (ASX:FMS) have called on Western Australia's Economic Regulation Authority, which makings rulings over rail networks, to have a closer look at TPI's figures. Flinders executive chairman Robert Kennedy has suggested that for the high price of $576 million per year, he could almost buy another railway line, and wants a fairer price.

The price only includes access to the railway infrastructure too, with haulage to be paid separately. Aurizon (ASX:AZJ) or Asciano's (ASX:AIO) Pacific National would operate the rail, and the iron ore miners would be up for their haulage costs. That could make their projects uneconomical.

Fortescue obviously wants to get the highest price it can, having invested its own capital in developing and building the infrastructure. The company would also then have to work with third parties on scheduling and other issues, something it doesn't have to contend with currently.

Fortescue itself had a running legal battle with Rio Tinto (ASX:RIO) and BHP Billiton (ASX:BHP) to access their rail networks, before building its own. The company is also looking for an investor to take a minority share in TPI, which could be worth as much as US$4 billion. With around US$10 billion of debts on its books, Fortescue wants to shore up its balance sheet, should iron ore prices fall drastically.

Foolish takeaway

With the outcome of the sale of the stake in TPI now delayed until at least July, smaller miners have been frustrated that they can't get their ore to port, with many deposits remaining untapped. Now it seems they are being further frustrated by 'unrealistic' costs to access the infrastructure they need.

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Motley Fool writer/analyst Mike King owns shares in BHP.

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