UPDATE: Atlas Iron, BHP Sign MOU On Port Hedland Infrastructure

BHP Billiton Ltd. (BHP) and Atlas Iron Ltd. (AGO.AU) have started discussions about co-operating on iron ore haulage and port access in Australia's Pilbara region, in a move that could open up BHP's proprietary rail network for the first time.

Third-party access to the Pilbara's miner-owned rail networks--built by BHP and Rio Tinto Ltd. (RIO) over the past 30 years and by junior rival Fortescue Metals Group Ltd. (FMG.AU) since 2006--could dramatically reduce export bottlenecks in the region, which produces around a third of the world's seaborne iron ore.

A decision by the Australian Competition Tribunal in June forced BHP and Rio to allow limited third-party access to the Goldsworthy line affected by the latest announcement and Rio's Robe River line, although the miners' main Mount Newman and Hamersley lines were allowed to remain closed.

However, Wednesday's announcement is the first move toward actual agreements between the region's major miners and its junior companies.

Hayden Bairstow, an analyst at CLSA in Sydney, questioned whether much would come of the discussions. "This doesn't change the game in the Pilbara. BHP and Rio will argue that their core lines will be fully utilized, whereas this is a third arm of rail that goes to a couple of deposits that are almost mined out for BHP."

The two companies said they entered a memorandum of understanding to deliver an "integrated transport solution" at Port Hedland, a port in the eastern Pilbara where BHP is currently the main exporter.

In a statement, Atlas and BHP said: "Atlas Iron and BHP Billiton Iron Ore have agreed to consider point-to-point rail haulage on BHP Billiton's declared Goldsworthy line to the junction of BHP Billiton's Newman rail line."

Atlas shares jumped 6.9% at market open in Sydney before slipping back a touch. The miner's Pardoo-Ridley project, which is estimated to be able to produce 15 million tons a year of magnetite iron ore, is within a few kilometers of the Goldsworthy line.

Port Hedland accounted for around 174 million tons of iron ore exports in the year to the end of June, 2010, making it Australia's busiest port by tonnage, with 1,303 vessels passing through.

However, access is severely constrained at the port, which accounts for roughly one sixth of global seaborne iron ore exports. BHP exports around 155 million tons a year of iron ore from two terminals at the port, while Fortescue hopes to reach 40 million tons of capacity over the current financial year.

Atlas, which trucks iron ore from its mines in the eastern Pilbara, expects to put 6 million tons a year of iron ore through Port Hedland this year.

The miner and two other members of the North West Iron Ore Alliance infrastructure group--Brockman Resources Ltd. (BRM.AU) and Ferraus Ltd. (FRS.AU)--have 50 million tons a year of agreed capacity at the site, making it harder for BHP to increase its own movements of iron ore through the port.

Increasing export capacity for BHP's iron ore was a major driver of the company's US$140 billion merger proposal with Rio Tinto--dropped in the midst of the financial crisis--as well as a joint venture plan between the two miners that was blocked by European regulators last month.

Heavy, low-value bulk commodities such as iron ore and coal have little value without the rail and port infrastructure needed to get them to consumers, so smaller miners are unable to develop otherwise attractive tenements in isolated parts of the Pilbara without access to rail.

Fortescue spent years suing for access to BHP and Rio's lines before building its own debt-funded line on the eve of the global financial crisis.

Last week, Hong Kong-based investment company Wah Nam International Holdings Ltd. (0159.HK) launched a A$930.6 million takeover of Brockman and Ferraus, saying it would consider building a fourth proprietary line to get the miners' ore to the coast.

-By David Fickling, Dow Jones Newswires; +61 2 8272 4689; david.fickling@dowjones.com

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