Australia: Mining Sector Update: January - February 2014

Introduction

Welcome to the January/February 2014 edition of the Australian Mining Sector Update, a monthly publication prepared by Corrs Chambers Westgarth for clients and contacts who are interested in the Australian mining industry.

This publication brings together a brief summary of information on recently completed deals, market rumours, potential opportunities and relevant regulatory updates.

Recent announcements

Further to our story in the December 2013 edition of the Australian Mining Sector Update, Wealth Mining announced that its off-market takeover bid for all of the fully paid shares in ASX-listed coal explorer Carabella Resources went unconditional on 13 January 2014. Wealth Mining is a wholly owned subsidiary of China Kingho Energy Group, one of China's largest privately held mining and energy companies. Wealth Mining increased its stake in Carabella Resources from 11.06% to 17.51% between its first announcement of the takeover offer on 3 December 2013 and the offer becoming unconditional, and also announced that it may purchase Carabella shares on-market during the remainder of the bid period for prices at or below A$0.455 per share.

India-based infrastructure company GVK Power & Infrastructure Limited announced on 11 January 2013 that it is hoping to achieve financial close on its Galilee Basin project within one year. The project includes a 79% stake in the Alpha Coal Project and a 100% stake in the Kevin's Corner Coal Project. GV Krishna Reddy, chairman of GVK, said that discussions are being held with a number of banks and that the company is exploring equity participation and fund infusion through banks and export credit agencies to fund the project.

The South Australian Government has approved ASXlisted iron ore miner IronClad Mining's application to establish a modest bulk ore stockpile facility at the Port of Lucky Bay on the Eyre Peninsula. This approval is the last link in the infrastructure chain and paves the way for the commencement of the Wilcherry Hill Iron Ore Project located in the north of the Eyre Peninsula. Following the approval, IronClad and ASX-listed Trafford Resources signed a formal joint venture agreement in respect of the Wilcherry Hill Iron Ore Project on 9 December 2013, giving Ironclad the right to earn an 80% interest in all manganese in the project tenements. IronClad will be the manager of the JV and can earn up to 80% in the project tenements by spending an aggregate of A$3 million over three years. An initial exploration program is planned to commence early this year.

On 20 December 2013, ASX-listed Whitehaven Coal announced that it has obtained final approval of its Maules Creek project, after the Northern Inland Council for the Environment challenged the validity of the project approval. Justice Cowdroy of the Federal Court dismissed the challenge, paving the way for Whitehaven to commence work on Maules Creek. Whitehaven's Managing Director and CEO Paul Flynn said that the company is determined to achieve first coal sales in the first quarter of 2015.

SEHK and ASX-listed Brockman Mining announced on 2 January 2014 that it has entered into an agreement with China Guoyin under which China Guoyin has agreed to subscribe for 195,000,000 shares in Brockman for HK$78 million (approximately A$11.5 million). The proceeds from the subscription shares will be used for the development of Brockman's iron ore mining projects in Western Australia, which include the Marillana Project, the Ophthalmia Project and a few other minor exploration projects in the area. The subscription is conditional on shareholder and stock exchange approval, such conditions to be satisfied or waived by 14 February 2014.

In related news, Brockman has entered into an agreement with Hong Kong-based marine transportation operator Ocean Line Holdings under which Ocean Line has agreed to subscribe for 292,500,000 shares in Brockman for HK$117 million (approximately A$17.2 million). Ocean Line is already a substantial shareholder of Brockman, currently holding approximately 19.57% of the share capital of Brockman. The agreement is conditional upon, among other things, approval of independent shareholders, stock exchange approval and permission to deal in the subscription shares, these conditions to be satisfied or waived by 14 February 2014.

ASX-listed iron ore miner Fortescue Metals announced on 16 January 2014 the signing of a long term Gas Transportation Agreement, which will see the construction of the 270km Fortescue River Gas Pipeline. Gas will be delivered to the power station at Fortescue's Solomon Hub via the existing Dampier to Bunbury Natural Gas Pipeline and the new Fortescue River Gas Pipeline. This is a key component of Fortescue's broader strategy to reduce energy costs and carbon emissions, and the subsequent conversion of the 125 megawatt Solomon Power Station from diesel to gas is expected to save Fortescue approximately US$20 million per annum. The new pipeline is expected to be operational by early 2015 and has the potential to open up long term growth across the Pilbara.

In other Fortescue news, the company announced on 13 January 2014 that it has assumed full ownership and operational responsibility of two Christmas Creek Ore Processing Facilities that it purchased from Crushing Services International, a subsidiary of ASX-listed Mineral Resources. Fortescue exercised its step-in rights in September 2013 and CEO Nev Power said that the buy-out of the finance lease is part of Fortescue's ongoing debt reduction program.

At a general meeting convened on 20 January 2014, ASX-listed Galilee Energy's shareholders voted against a proportional takeover bid made by Olympus Funds Management Pty Ltd, a wholly owned subsidiary of ASX-listed Mercantile Investment Company, to acquire one of every two ordinary shares for A$0.15 per share. Mercantile Investments announced on 21 January 2014 that, as a result of the shareholder vote, the takeover cannot proceed and Olympus will withdraw the offer.

Recently completed deals

U&D Coal's Initial Public Offering through the ASX Bookbuild facility closed on 20 December 2013. U&D has announced that the final Bookbuild price of A$0.50 was achieved and a total value of A$50,118,000 was successfully raised. U&D has two Bowen Basin coal mine development projects: the Meteor Downs South project near Rolleston and the Broughton Project located near Nebo. U&D expects that the Meteor Downs South project could commence coal production in the first half of 2015.

Further to our story in the December 2013 edition of the Australian Mining Sector Update, ASX-listed iron ore miner Aquila Resources announced on 19 December 2013 that Baosteel Group Corporation and several of its subsidiaries purchased a total of 19 million shares in Aquila. This acquisition increases Baosteel's holding in Aquila to 19.79%. Baosteel is one of China's largest steel manufacturers, which initially acquired a 15% interest in Aquila in 2009.

Market rumours and opportunities

Further to our story in the December 2013 edition of the Australian Mining Sector Update, the Australian Financial Review has reported that minority investors in ASX-listed miner Yancoal Australia are expected to challenge the decision made by the Australian government to remove the foreign investment restrictions on Yancoal's majority shareholder, Yanzhou Coal Mining Company Limited. The conditions were originally imposed on Yanzhou in connection with the merger of Yancoal with Gloucester Coal Ltd in March 2012, and would have required Yanzhou to, among other things, reduce its economic ownership of Yancoal from approximately 78% to below 70% by 31 December 2013. The Treasurer noted in his decision that the Australian Government has no in-principle objection to 100% foreign investment in Australian companies where it is not contrary to the national interest.

Newswire Round-up has reported that Indian power producer Lanco Infratech is considering selling its Australian subsidiary, Griffin Coal Mining Company, to help repay its debt. Lanco Infratech reportedly reached a deal with its lenders in September 2013 to restructure US$5.5 billion in debt, and is reportedly considering a number of options in addition to the sale of Griffin Coal, which it acquired in 2011 for A$750 million.

The Australian Financial Review has reported that ASXlisted Mineral Resources could be looking to divest its iron ore division given that the price of iron ore has been above US$130 per tonne since August 2013. Mineral Resources' iron ore division includes Polaris Metals and deposits in the Yilgarn and Pilbara regions, which reportedly could be valued from A$500 million to A$1 billion.

Macquarie Infrastructure and Real Assets has reportedly joined with Marubeni to bid for the long-term lease of the Port of Newcastle, according to the Australian Financial Review. Hastings Funds Management is reportedly looking for a bidding partner, and other bidders reportedly participating in the bidding process are Asciano and Deutsche Asset Management. Brookfield, QIC and The Future Fund are considered by the Australian Financial Review to be likely bidders. The report states that indicative offers are due by the end of January, and an outcome on the tender is likely to be announced before the next New South Wales State budget in May 2014.

Further to our story in the December 2013 edition of the Australian Mining Sector Update, The Australian has reported that the Korea Trade Insurance Corporation has approved US$1.2 billion in loans to the Roy Hill iron ore project in WA. This reportedly brings the total funding secured for the Roy Hill project in December 2013 to almost US$3 billion. The decision came a fortnight after another South Korean agency, the Korea Export-Import Bank, reportedly agreed to provide US$1 billion in loans to the project. The US Export-Import Bank has also authorised a US$694 million loan to Roy Hill, reportedly in exchange for the purchase of American mining and rail equipment from companies such as Caterpillar and GE. The Roy Hill project involves a 55 Mtpa iron ore mine in the Pilbara region, a 344km railway and a new port at Port Hedland.

Forbes has reported that Vale is planning to sell a 15-25% stake in its coal business, which includes operations in Australia and Mozambique. Vale's coal operations in Australia include an 80% stake in the Carborough Downs coal mine in the Bowen Basin, a 50% stake in the Isaac Plains coal mine in the Bowen Basin (a joint venture with Sumitomo), a 61% stake in the Integra coal mine in the Sydney Basin, and interests in undeveloped projects including the Belvedere project in the Bowen Basin. This decision is reportedly a result of Vale deciding to focus on its core iron ore business.

Regulatory updates

EPBC ACT WATER TRIGGER GUIDELINES RELEASED

The Federal Government amended the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) in June 2013 to provide that water resources are a matter of national environmental significance in relation to coal seam gas and large coal mining developments. The amendments commenced on 22 June 2013 and allow the Minister to consider and impose conditions directly relating to impacts on a water resource itself. On 20 December 2013, the Department of the Environment released Significant Impact Guidelines to assist proponents in deciding whether a particular action is likely to have a 'significant impact' on a water resource. Broadly, a 'significant impact' is a real or not remote chance or possibility that an action will directly or indirectly result in a change to either the hydrology or the water quality of a water resource, that is of a sufficient scale or intensity as to reduce (or create a material risk of reducing) the current or future utility of the water resource for third party users.

The Significant Impact Guidelines and further information can be found here.

NEW STATE PLANNING POLICY IN EFFECT

The Queensland Government's new State Planning Policy (SPP) came into effect on 2 December 2013, replacing the 14 separate policies previously in existence. The SPP lists 16 state interests organised under the five broad themes of liveable communities and housing, economic growth, environment and heritage, hazards and safety and infrastructure. The state interests are matters the Queensland Government has an involvement in to meet economic or environmental objectives, or to ensure Queensland's planning system operates efficiently and effectively. Councils must consider these interests when preparing or amending local planning schemes, or assessing development applications.

The SPP and accompanying guidance material are available here and here respectively.

Other news

PROPOSED AMENDMENTS TO ANNUAL RENTAL FOR MINERAL DEVELOPMENT LICENCES

On 11 December 2013, the Queensland Minister for Natural Resources and Mines, Andrew Cripps, announced a review of the rents-payable system for holders of mineral development licences (MDLs). The option being considered is an incremental increase in rental rates over ten years to match that payable on a mining lease and the phasing-out of area discounts over a four year period. The purpose of the proposed amendment is to encourage MDL holders to either relinquish land for further exploration or convert their MDLs to mining leases. If the proposed amendments take effect, the new regime will commence on 1 September 2014.

Further information and the consultation Regulatory Impact Statement are available here. Submissions regarding the proposed amendments close at 5pm on Friday 28 February 2014.

SINGLE QUEENSLAND AND COMMONWEALTH ENVIRONMENTAL ASSESSMENT PROCESS

On 13 December 2013, Queensland Premier Campbell Newman and Minister for Environment and Heritage Protection Andrew Powell announced that Queensland has finalised a new agreement on environmental assessments with the Commonwealth Government. The agreement relates to the establishment of a single assessment process incorporating both state and federal requirements, which will reduce unnecessary duplication. Mr Powell said that the new assessment process would deliver enhanced cooperation between the governments to ensure the highest environmental standards are met.

SUBMISSIONS FOR NORTH GALILEE BASIN RAIL PROJECT OPEN

In line with the recent release of the Galilee Basin Development Strategy, Queensland's Coordinator-General has approved the release of an Environmental Impact Statement for the A$2.2 billion North Galilee Basin Rail project and is inviting public feedback. The project involves the construction of a 300km rail line by Adani Mining, which will connect the proposed Carmichael Coal Mine and Rail project to the Abbot Point coal port. If approved, the North Galilee Basin Rail project will have the ability to carry 100 million tonnes of coal per year.

The North Galilee Basin Rail project documents are available here. Submissions are due by 5pm on 11 February 2014.

WA GOVERNMENT HANDS OUT $5.6 MILLION IN GRANTS TO EXPLORATION PROJECTS

Western Australian Minister for Mines and Petroleum Bill Marmion has announced that 46 exploration drilling projects will receive a total of $5.6 million in grants through the Co-funded Drilling program, a flagship program of the Exploration Incentive Scheme (EIS). Mr Marmion said the EIS Co-funded Drilling program provides incentives to drill in under-explored areas, which in the past has helped unearth substantial new resource discoveries. The program refunds up to 50% of the direct drilling costs with caps of A$150,000 for a multi-hole project, A$200,000 for a single deep hole, and A$30,000 for a prospector's project. The Western Australia government has allocated a total of A$130.27 million to the EIS from 2008-09 to 2016-17.

IRON ORE INDUSTRY REVENUE EXPECTED TO REBOUND

According to IBISWorld, iron ore industry revenue is expected to rebound in 2013-14 by 13.6% to A$67.2 billion due to higher output and price increases. In Australia, iron ore miners added another A$65 billion to their value over the last half of the financial year, with Mount Gibson Iron reportedly up 111% since 30 June 2013, Arrium up 93% and Fortescue Metals Group up 92%. Port Hedland posted a number of record months, reportedly peaking at A$25.2 million in October 2013, with the port's general manager John Finach reportedly predicting uptrends for the next year and about 320 million tonnes of port throughput for the 2013-14 financial year. It is reportedly expected that industry output will increase by 6.7% annually over the next five years.

NEW SOUTH WALES FINALISES CSG REFORMS

The New South Wales Government announced on 28 January 2014 that it has finalised coal seam gas (CSG) reforms which put safeguards in place for approximately 5.3 million hectares of the State's residential and agricultural land, representing about 6.6% of the total land area of New South Wales. The reforms apply CSG exclusion zones across 2.7 million hectares and identify Critical Industry Clusters over viticulture and equine land in the Upper Hunter region. No new CSG activity is allowed in a Critical Industry Cluster and mining proposals in these areas will now have to go through an independent assessment process. This is the second stage of reforms following the first stage implemented in October 2013. Minister for Resources and Energy Anthony Roberts said that the reforms would ensure agriculture, sustainable resource development and communities could co-exist.

More information is available here and here.

ICAC RECOMMENDS COAL EXPLORATION LICENCES BE CANCELLED

Barry O'Farrell, the Premier of New South Wales, announced on 20 January 2014 that the New South Wales Government intends to introduce legislation to cancel the exploration licences for Doyles Creek, Mt Penny and Glendon Brook. The cancellation of the exploration licences was recommended by the Independent Commission Against Corruption (ICAC) and any future issue of licences for the affected areas will be consistent with the ICAC's recommendations on probity. The Government does not intend to provide compensation for the cancellation of those exploration licences and will require all exploration data on the tenements to be provided to the New South Wales Government.

More information is available here and here.

LAND COURT DECISION – GREGCARBIL PTY LTD V BACKUS & ORS (NO. 4) [2013] QLC 68

This Queensland Land Court decision determined the compensation payable for two mining lease applications (MLAs) under the Mineral Resources Act 1989 (Qld) (MRA). The issue in contention was the method of valuing compensation. After considering the relevant authorities, Member Smith noted that section 281 of the MRA applies equally to a tiny ML on a huge outback property as it does to an open cut operation over the totality of a rural property. The MLAs under consideration were in the "middle spectrum"; they were for a relatively large area of land but were subject to significant restrictions as to the amount of land that could be significantly disturbed at any one time. A number of variables had to be considered, therefore, to determine the diminution in value percentage; these included the term of the lease, the amount of the lease likely to be actually impacted by the mining operations and the EA, and the relative ease for cattle to graze on the balance land of the MLA.

The decision is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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