Consider Aurizon’s 5.6%–5.7% Bonds as Demand for Coal Persists in the Near to Medium Term

Introduction

Aurizon Holdings is a rail freight operator based in Australia. The group is a publicly listed company on ASX (Australian Securities Exchange), being valued at AUD 6.1 billion as of 21 January 2026.

Its core operations are split into 1) bulk (commodities like iron ore, grain, bauxite etc), 2) coal, 3) containerised freight and 4) network (rail infrastructure management).

Also a rail infrastructure operator

Unlike its competitors (Pacific National, Qube Holdings, Magnetic Rail) that predominantly focus on freight transportation, Aurizon Holdings manages and operates two major rail infrastructure assets in Australia, notably the Central Queensland Coal Network and the 2,100 km Tarcoola to Darwin railway.

Chart 1: Aurizon’s footprint

Source: Aurizon Website, iFAST compilations. Data as of 25 November 2025.

The Central Queensland Coal Network is the crown jewel of Aurizon, as it connects more than 50 coal mines to export terminals, allowing the group to earn track access revenue from third party users. In fact, network division contributes to around 60% of the group’s EBITDA in FY25, considerably outperforming its other divisions.

The beauty of Aurizon’s network business is that it is designed per the regulation mechanism, to deliver to Aurizon with a real rate of return. Aurizon’s allowable revenue on network consists of (weighted average cost of capital x regulatory asset base) + inflation rate + depreciation allowance + tax allowance + working capital allowance, basically allowing the group to yield a steady income flow.

Aurizon’s ambitious bet on land-bridging solution

One of the key assets Aurizon acquired through its 2022 acquisition of One Rail Australia is the 2,100 km Tarcoola to Darwin railway. This move highlights management’s intent to diversify away from coal-heavy business and focus more on general freight. This also underscores their ambition to turn the Port of Darwin into a gateway for shippers’ cargo, enabling cargo to be offloaded in Darwin (top end of Australia) and then transported via rail to major Australian cities such as Melbourne, Brisbane, and Sydney.

Land-bridging trials had taken place in 2024, with the railing of imported motor vehicles from the Port of Darwin to Adelaide and Melbourne, which was successful. While the land-bridging solution has yet to become fruition, the stable and predictable cash flows from its network division allows the group to take the calculated risk.

Aurizon has also secured several bulk customers that utilises the Tarcoola to Darwin railway for subsequent export purposes, although numbers are still minimal. Currently, a small number of exports (2% of 2024 total export trade volume) and imports (6% of 2024 total import trade volume) goes through Port of Darwin (Northern Territory).

Chart 2: Australia’s 2024 export trade by state (volume)

Chart 3: Australia’s 2024 import trade by state (volume)

As per previous agreement, the group will operate Central Queensland Coal Network until 30 June 2109 (with option to further extend for another 99 years), while the Tarcoola to Darwin railway expiration will be on 14 January 2054, where the ownership will transfer to the Australian Government upon expiration.

Softening in coal demand will be gradual

Part of Aurizon’s business, particularly the network and coal division relies on the overall demand for coal. Looking at the world coal consumption, we can notice that China, the world’s largest coal consumer, has not taken its pedal off from coal usage. Even though China’s coal consumption as a percentage of electricity production has decreased (given the increase in green energy), but the absolute coal usage has not declined significantly in recent years due to the gargantuan need for power consumption.

Chart 4: Nation’s coal consumption

In fact, as per the Centre for Research on Energy and Clean Air (CREA) findings, in 1H25, the new and revived coal proposal in China totalled 75GW, the highest 1H figure in a decade. This reflects a continued push to advance coal projects before China’s 2030 carbon peaking deadline.

Chart 5: Global Coal Plant Tracker

In India, coal remains a cornerstone of the nation’s energy mix, accounting for over 74% of electricity generation. At the same time, Prime Minister Modi’s push for self-reliance has led India to reduce dependence on any single supplier. Therefore, Australia’s share of coal export to India has actually reduced (from 60% metallurgical coal export shares in 2023 to 55% in 2024) as India diversified to other sources such as Russia, US and Indonesia.

Looking ahead, we expect coal demand (coking coal, thermal coal, metallurgical coal) to soften, but in a gradual manner. This is driven by the lower addition of new coal plants coupled with the retirement of old coal plants, plus the switching of liquid natural gas as a bridge fuel (in relative to coal).

US’s opposition to global carbon tax, plus its withdrawal from the Paris agreement will indirectly espouse other nations to continue using non-renewable energy like oil, gas and coal. On top of this, China’s 2030 carbon peak goal means that there is still several years to go before China closes its lids on increasing carbon emission. This supports our view that any decline in global coal consumption will occur in a gradual manner.

Network division forms a predictable stream of regulated revenue for Aurizon

Aurizon logged AUD3.95 billion in revenue in FY25, an increase of 3% yoy. This is contributed by the higher regulated revenue (network), offsetting the lower grain volumes in bulk divisions. EBIT and net profit margin each recorded at 21% and 9% respectively.

Table 1: Aurizon’s profit trends

Looking back, network division has contributed about 55%-60% of total EBITDA, a major revenue pillar for the group.

Table 2: Aurizon’s EBITDA breakdown

Find comfort in Aurizon’s credit ratios

The Group’s interest coverage ratio declined to 2.45 times in FY25, down from 2.75 times in FY24, continuing a downward trend. This reflects higher net financing costs from increased borrowings, as well as greater depreciation expenses driven by growth in regulatory base assets. Nonetheless, without the non-cash effect (depreciation), interest coverage ratio will be at a higher 4.57 times (FY24: 4.88 times).

Also, Aurizon’s shareholders distribution (buyback of ordinary shares + dividends paid) would have been sufficient to cover net financing costs at 1.73 times in FY25, had the company chosen to allocate funds for that purpose.  

As for the group’s debt, debt/EBIT stood at 6.30 times while debt/net cash flow (operating) stood at 3.64 times, reflecting a healthy churn of cash flow turnover, as well as manageable debt level.

Table 3: Aurizon’s credit ratios

In addition, Aurizon is sitting on a valuable asset, namely the Central Queensland Coal Network which is churning close to AUD1 billion in EBITDA per year. In fact, the group is exploring to sell up to 49% stakes in the network, seeking bids of AUD4 billion for the stakes. While the management has not explicitly stated the purpose, the sale attempt is likely intended to reduce debt as well as funding growth initiatives in bulk and containerised business.

All in all, we find comfort in Aurizon’s credit ratios, with the group having avenues to pare down leverage if needed (cutting on shares buyback and dividends, selling stakes in rail network).

Risks

The phasing down of coal does represents a tangible long-term risk due to Aurizon’s heavy reliance on the coal sector.

Nonetheless, Australia’s largest coal export destinations either lack firm coal phase out timelines or set them well into the 2040s, rendering Aurizon breathing space to pivot from coal-concentrated model to bulk and containerised model. Hence, we opine that the associated risk is manageable, particularly for the bond tenure we are recommending. 

Table 4: Latest announcement by top coal import nations

Recommendation

Amidst the ongoing energy transition, we continue to see value in Aurizon’s medium tenure bonds, particularly the 2030 and 2031 bonds, where demand for coal is expected to be sustained through this period. Both bonds are yielding around 5.6%-5.7%, which has some yield pickup against similarly tenured Australia bank bonds.

Table 5: Recommended Aurizon bonds