Why Genesee & Wyoming’s Australian Operations Remain Critical?
Why Genesee & Wyoming Has Taken a Dive these Last 12 Months
GWR’s Australian operations
In the previous part, we looked at the bigger picture behind Genesee & Wyoming’s (GWR) operating margins. In this article, we’ll dig deep into GWR’s Australian operations to see what went wrong.
The Australian operations cover intrastate haulage of bulk commodities including grain, steel, gypsum, minerals, and short-haul shunting and terminal operations. Genesee & Wyoming’s Australian segment contributed nearly 12% to its revenues in 2015.
Investors should realize that even after aggregating the Freightliner Australia’s $36.0 million freight-related revenues in 2015, the total revenues from the Australian operations fell by a remarkable 23% compared with 2014. When compared with the North American operations’ drop of ~5%, this fall is more significant.
Why did it happen?
Freightliner derived revenues of $75.0 million from its Australian operations in 2014 through freight-related and hauling coal and cotton on the East Coast. However, in its 2015 10K report, Genesee & Wyoming (GWR) stated that all the new operations revenues of Freightliner Australia were freight-related. To paraphrase Jack Hellmann, the company’s CEO, is this an indication of the evaporation of a piece of Freightliner’s Australian business?
Australia has rich reserves of coal, iron ore, gold, and silver. China is the world’s largest market for Australian commodity exports. The Chinese slowdown coupled with commodity price crash in 2015 has reduced the pace of commodity exports from Australia. Declining iron ore prices had put enormous pressure on Australian players like Rio Tinto (RIO) and BHP Billiton (BHP). Although GWR Australia had a smaller exposure to coal, the other commodities crash weighed on the Australian operations.
The iShares MSCI Global Metals & Mining Producers ETF (PICK) holds 23.1% in RIO and BHP.
Genesee & Wyoming (GWR) received 22% of its total 2015 revenues from its ten largest customers. Two of its ten largest customers in 2015 were located in Australia. Arrium Limited (ARI) is the largest iron ore customer. Due to declining iron ore prices, Arrium conserved its Southern iron mine in April 2015. Subsequently, in February 2016, ARI announced a recapitalization plan.
Currently, Arrium continues to operate its Whyalla-based operations that include the Middleback Range iron ore mines. However, GWR’s future revenues depend upon the continuance of ARI’s Middleback range iron ore mining operations. The current commodity price and demand have cast a shadow over GWR’s hauling prospects for one of its biggest customers.
In the next part, we will assess whether Genesee & Wyoming’s debt levels are reasonable or not.
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