BHP Group Offers A$4.85 Billion for Australian Coal Rail Assets

May 26 (Bloomberg) -- BHP Billiton Ltd., Xstrata Plc and 11 other coal miners in Australia bid A$4.85 billion ($4 billion) for the nation’s biggest coal railroad to head off the state government’s planned initial public offering of the assets.

The bid is more that what Queensland state would be able to achieve in an IPO, Nick Greiner, chairman of the Queensland Coal Industry Rail Group, said today in a statement. An IPO may raise A$3 billion, according to the Australian newspaper.

The 13 miners including Rio Tinto Group and Peabody Energy Corp. may have more incentive to add tracks than a single owner, who may seek to profit by raising fees on a monopoly asset. They plan to spend A$2.05 billion to expand the railroad to meet demand from Asian steel mills, Greiner said.

“The rail group is bidding more for the track alone than what the government was hoping to achieve for the whole network,” said Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney. “The incentive for the coal miners is to get more of their coal on ships, which means more tracks and cheaper transport. There is little incentive for a privatized vertically integrated enterprise to expand track.”

Australian Rail Track Corp., which manages tracks in three states including the Hunter Valley coal network in New South Wales, would run the railroad, Greiner said. Australian Rail Track intends to participate as an equity owner and discussions are advanced, Greiner said.

Committed to Expansion

QRNational Coal, a unit of state-owned QR Ltd., operates more than 540 train services from 56 mines for 23 customers each week in Queensland and New South Wales, according to the company’s annual report. The business booked sales of more than A$1.3 billion in 2008 and 2009, and transports about 185 million metric tons per year.

Queensland Premier Anna Bligh, who said in March that an IPO would maximize the value to the taxpayer, said in June that the non-passenger parts of its rail network may be worth A$7 billion. The state planned to keep a 25 percent to 40 percent stake in the network.

Bligh will “examine the detail” of the bid, the Australian Broadcasting Corp. cited her as saying. Bligh and state Treasurer Andrew Fraser weren’t immediately available to comment.

The miners’ group, which accounts for 98 percent Queensland’s export coal industry, is committed to expanding the network to support growth and has arranged a loan of A$1.35 billion, Greiner said in an e-mailed statement. The network currently operates in a “sub-optimal” way, Greiner said.

Capacity Constraints

“This is about guaranteeing that investments are made in the regulated assets at the right time or early,” Greiner said. “The coal companies are incentivized to invest more in the track, maintain the track better and operate it better.”

Rail constraints in Queensland’s Bowen Basin will persist for as long as two years, hindering export growth, Deutsche Bank AG said in March, citing an independent report.

The Dalrymple Bay port, which ships steelmaking and power- station coal from Queensland, may be constrained for as long as two years, possibly limiting export to as little as 65 million tons of coal this year, compared with a terminal capacity of 85 million tons, Deutsche said.

“Rail in the Bowen Basin has been a sore point with the miners for an extended period, as two sections are missing from the heavy haulage rail line, so that the major production area in the central Bowen is isolated from the under-utilized Abbot Point terminal to the North, and the coal terminals at Gladstone to the south,” Sydney-based Credit Suisse AG analyst Paul McTaggart.

Price Increase

BHP and Mitsubishi Corp., which own the world’s largest coking coal exporter, won a 55 percent price increase from JFE Holdings Inc. in March for a three-month coking coal accord starting in April. BHP expects an annual demand growth rate of 5.5 percent until 2025, Hubie van Dalsen, the president of BHP’s metallurgical coal operations, said in a May 5 presentation.

Queensland is selling assets to prop up finances after forecasts the global recession will cut government revenue by A$15 billion over four years to 2012. Credit Suisse Group AG, Goldman Sachs JBWere, Merrill Lynch, Royal Bank of Scotland Group Plc and UBS AG are managers for the share sale.

BHP, Rio, Xstrata, Peabody, Anglo American Plc, Macarthur Coal Ltd. Vale SA, Wesfarmers Ltd., Ensham Resources Pty, Felix Resources Ltd. and Jellinbah Resources have all signed equity commitments for the bid. New Hope Corp. and Aquila Resources Ltd. support the bid and have the opportunity to contribute equity at a later stage, Greiner said.

The acquisition loan is underwritten by ANZ Banking Group Ltd., BNP Paribas SA and Citibank NA. the group said.