Mining Sector Update: July 2013 Edition - Mining

INTRODUCTION

Welcome to the July 2013 edition of the Australian Mining Sector Update, a monthly publication prepared by Corrs Chambers Westgarth for clients 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

On 30 May 2013, ASX-listed Cockatoo Coal announced that it has reached an agreement to sell its 30% interest in Hume Coal to POSCO Australia for A$9.74 million cash and the termination of 134.8 million Cockatoo Coal shares held by POSCO Australia. the deal is conditional on shareholder and regulatory approval, as well as a positive independent expert opinion in relation to the fairness and reasonableness of the agreement. the deal will end Cockatoo Coal's management agreement with Hume Coal, as well as cancelling all future cash call obligations of Cockatoo Coal for exploration and development funding of the Hume Project in new south Wales, allowing Cockatoo Coal to concentrate on the 3.5Mtpa expansion of its Baralaba Coal Mine in Queensland's Bowen Basin. POSCO Australia has sent Cockatoo Coal a letter of intent regarding the purchase of 1Mtpa of metallurgical coal from the Baralaba Coal Mine following completion of its expansion. The proposed sale is anticipated to be executed by August 2013.

Further to our story in the May 2013 edition of the Australian Mining sector update, ASX-listed explorer Mindax announced on 11 June 2013 that the Board of Perpetual Mining Holding Limited (PMHl) has formally approved the proposed joint venture between Mindax and PMHl for the Mt Forrest iron Project in Western Australia. Negotiations for a binding Joint Venture Agreement based on the Memorandum of understanding between the parties are expected to commence straight away. Any required statutory approvals will also be pre-conditions for the completion of the transaction.

On 5 June 2013, ASX-listed mineral explorer FairStar Resources announced that it has secured a binding A$260 million funding commitment from Alliance Super Holdings for its Steeple Hill Iron Project located in Western Australia's Yilgarn region. the commitment, which represents 80% of the funding required for the Project, will result in a 50/50 profit sharing joint venture arrangement between Fairstar and Alliance Super Holdings for the Project. As part of the arrangement, Fairstar's debt will be retired in its entirety. However, the arrangement remains subject to Fairstar securing the residual 20% of funding, as well as a formal Joint Venture Agreement being signed between the parties. Fairstar has stated that it is in advanced negotiations with four parties in relation to the remaining 20% of funding, as well as in relation to an offtake agreement for up to 16Mt of the initial 20Mt of the Project's JORC indicated mineral resource and a further 4Mt of ultra-fines.

Also on 5 June 2013, ASX-listed Cuesta Coal announced that Chinese state-owned Beijing Guoli Energy Investment has received Chinese regulatory approval for its A$12 million investment in Cuesta at A$0.18 per share. The share placement will occur through Beijing Guoli's wholly owned subsidiary Longluck Investment (Australia), with the funds from the investment expected to be used towards decreasing the convertible note liability from the Orion Coal Project acquisition, as well as towards the exploration and development of Cuesta's Moorlands Project in Queensland's Bowen Basin. As the investment has already received FirB approval in April 2013, the share placement is anticipated to be completed once Cuesta shareholder approval is obtained. This transaction brings Beijing Guoli's total investment in Cuesta to A$32 million.

ASX-listed iron ore miner Iron Mountain Mining announced on 6 June 2013 its intention to make an off market take over bid for ASX-listed iron ore miner Red River Resources. Iron Mountain is still developing a formal Bidders statement to lodge with AsiC, but the bid will cover all shares and options issued in red river, subject to several conditions. Red river's shareholders will be offered A$0.015 per share plus one iron Mountain share for every six red river shares they hold. As no other offer will be made by iron Mountain for options held in red river, those who hold such options will need to exercise them so that they can take part in Iron Mountain's bid.

On 10 June 2013, ASX-listed iron ore miner Gindalbie Metals announced that it has agreed in theory to a proposed financial and ownership restructure of the Karara Project with its joint venture partner China's Ansteel. Under the proposed restructure, Ansteel will provide all required short-term funding to the joint venture for the next year until a new longterm working capital facility is obtained in exchange for the option to increase Ansteel's current 50% interest in the Karara Project to 52.16%. The proposal remains conditional upon final agreement, FIRB approval, Chinese regulatory approval and bank consent. Following the completion of the proposed restructure, Gindalbie will be debt free and able to advance the development of its wholly owned projects, including the Shine DSO hematite deposit located in Western Australia's Mid West.

ASX-listed iron ore miner Iron Road announced on 13 June 2013 a fully underwritten capital raising to complete the definitive feasibility study for its Central Eyre Iron Project located in south Australia. Sentient Global Resources Fund III and Sentient Global Resources Fund IV, two major iron Road shareholders, have fully underwritten the entitlement offer which entails a one-for-one non-renounceable offer of new Iron Road shares at a price of A$0.18 per new share. The entitlement offer is expected to raise A$50.7 million. The Central Eyre Iron Project has recently been confirmed as possessing the largest Measured and Indicated magnetite resource in Australia and the definitive feasibility study for the project will target the production of 20Mtpa of high grade concentrate.

RECENTLY COMPLETED DEALS

On 19 June 2013, ASX-listed Whitehaven Coal announced that Farallon Capital Management, along with its wholly owned subsidiary Noonday Asset Management Asia, have acquired an approximate 9.91% interest in Whitehaven Coal from nathan tinkler's Aston Resources Investments and Boardwalk Resources Investments. The 101.5 million Whitehaven Coal shares were acquired for approximately A$300 million at a price of A$2.96 per share. Farallon has also agreed to buy a further 16.6 million Whitehaven Coal shares (approximately 1.36%) from ASM Equities Fund, conditional upon receiving FIRB approval, therefore making Farallon the largest shareholder in Whitehaven Coal.

In related news and further to our story in the June 2013 edition of the Australian Mining Sector Update, Tinkler's Mulsanne Resources has reached a settlement with ASX listed coal miner Blackwood Corporation whereby Blackwood will cease its current A$28 million claim against Mulsanne Resources has reached a settlement with AsXlisted coal miner Blackwood Corporation whereby Blackwood will cease its current A$28 million claim against Mulsanne resources in exchange for A$12 million. Under the settlement agreement, Tinkler has until 30 June 2013 to make the A$12 million payment otherwise the legal proceedings will recommence.

MARKET RUMOURS & OPPORTUNITIES

MiningNewsPremium has reported that further divestments may be considered by BHP Billiton in order to cut costs within its Australian coal business. Coal President Dean Dalla Valle has reportedly stated that the company is not pursuing any new major projects but will carry on with its committed expansions. Both BHP Billiton's Broadmeadow Project and Daunia Project in Queensland's Bowen Basin have achieved first production in March 2013 after being completed ahead of schedule. Coal Project Development Vice President Phil Hynes has reportedly commented that BHP Billiton's Illawarra Coal Appin Area 9 Project in New South Wales, which is set to have a production capacity of 3.5Mtpa, is advancing as anticipated, with first production expected in 2016. Reportedly, BHP Billiton's Queensland coal business is currently producing at 100% of supply chain capacity.

Further to our stories in the April 2013 and May 2013 editions of the Australian Mining Sector Update, ASX-listed Rio Tinto has reportedly prepared a shortlist of bidders for its interest in Iron Ore Co. of Canada (IOC) after receiving up to 15 initial indicative offers. Newswire Round-up has reported that private equity players Apollo Global Management has made a bid through the second round of the sale process, while reports from other sources including the Wall Street Journal and Hong Kong's Oriental Daily have also suggested that india's Aditya Birla Group, China's Foson Group and China Minmetals, private equity group Blackstone and London-based Vedanta Resources are reportedly among the potential bidders.

Glencore is reportedly unlikely to proceed in the iOC sale process in order to concentrate on its recent merger with Xstrata. According to Newswire Round-up, Glencore and Rio tinto have held preliminary discussions in relation to potentially merging their coal businesses in Australia. With the falling thermal coal prices and both Glencore and rio Tinto owning thermal coal mines located in New South Wales' Hunter Valley, such a merger was reportedly raised as a rational conclusion, however both Glencore and Rio Tinto have refused to comment on the speculation.

In other Rio tinto news and further to our stories in the January/February 2013 edition of the Australian Resources Sector Update and the May 2013 edition of the Australian Mining Sector Update, Rio Tinto is reportedly close to finalising the sale of a 29% interest in Coal & Allied, which holds coal projects in new south Wales. The Sunday Morning Herald has reported that Chinese state-owned Shenhua Group and India's Aditya Birla Group and Coal India are among the interested parties, while the Australian Financial Review has reported that ASX-listed coal miner New Hope could be a potential buyer, using its A$1.5 billion war chest towards an acquisition. Newswire Round-up has also reported that Japanese trading conglomerate Marubeni Corporation has made a bid for the Coal & Allied interest. The Australian has cited analysts as stating that it would be more beneficial to Rio Tinto to fully divest its Coal & Allied interest as opposed to divesting only part of its interest. The assets Rio Tinto are putting on the market have an estimated value of A$3.2 billion, with proceeds from any sales reportedly going towards reducing Rio Tinto's debt. Deutsche Bank is reportedly handling the divestment process.

Further to our stories in the April 2013, May 2013 and June 2013 editions of the Australian Mining Sector Update, Coal India has reportedly executed confidentiality agreements and begun due diligence processes with up to three Australianbased mine owners. According to the Hindu Business Line and The Economic Times, Coal India's board reportedly anticipates meeting in the coming weeks to consider and finalise proposals to acquire majority interests in two Australian thermal coal companies with production capacities of up to 16Mtpa, provided that the acquisitions are consistent with the government's 12% return on investment standard.

Further to our stories in the April 2013 and May 2013 editions of the Australian Mining sector update, the Australian Financial Review has reported that ASX-listed iron ore miner Fortescue Metals is unlikely to reach an agreement to sell a minority stake in The Pilbara Infrastructure (TPI) before July 2013, missing its 30 June 2013 target. Reportedly, Fortescue Metals is continuing with negotiations, with Cheung Kong Infrastructure and Brookfield Infrastructure Partners believed to be among the potential bidders. suggestions have been reportedly raised that Fortescue Metals may consider deserting sale plans for TPI in exchange for a less satisfying result such as a sale of its haulage rights.

According to the Wall Street Journal, ASX-listed exploration company Iluka Resources is contemplating a spin off of an iron ore royalty it acquired through the sale of a joint venture interest in the 1990s, whereby Iluka resources receives a payment on each tonne of iron ore sold or produced by a BHP Billiton mine in Western Australia. reportedly, Chief Executive of Iluka Resources David Robb has commented that the logistics of the potential spin off are being considered, including any tax consequences. The iron ore royalty is reportedly valued at up to A$800 million.

REGULATORY UPDATES

STATE REVENUE LEGISLATION AMENDMENT BILL 2013 (NSW)

The State Revenue Legislation Amendment Bill 2013 (NSW) has been introduced into the New South Wales Parliament and proposes to make significant stamp duty changes in the following areas:

nominations and novations involving call options over New South Wales land;
the treatment of mining tenements; and
landholder duty.

We have prepared a Corrs In Brief on these proposed changes: http://www.corrs.com.au/publications/corrs-in-brief/ proposed-new-south-wales-stamp-duty-changes/

OTHER NEWS

ONLY 6 MONTHS UNTIL NEW JORC CODE IN PLACE

Further to our story in the January/February 2013 edition of the Australian Resources Sector Update comes a reminder that there is less than six months to go before the new JORC Code 2012 Edition is adopted, replacing the 2004 Edition. By 1 December 2013, all AsX-listed companies must comply with the new JORC Code 2012 Edition, as well as the Listing Rules in relation to disclosure procedures.

QUEENSLAND'S STATE BUDGET

Treasurer Tim nicholls and Minister for Natural Resources and Mines Andrew Cripps have announced that A$30 million in funding from the Queensland government's 2013-2014 budget will be allocated to initiatives of Geological Survey of Queensland (GSQ). Minister Cripps credited the competitive cash bidding process for providing the money to fund a number of the priority initiatives which are designed to support mineral and energy-related exploration in Queensland. The treasury has also predicted that A$11 billion in royalties will be paid by the coal industry over the next four years. The Chief Executive of the Queensland Resources Council Michael Roche has commented that, while the GSQ initiatives are encouraging, this budget maintains the legacy of an uncompetitive suite of coal royalty rates from the previous year's budget resulting in some of the highest tax rates globally for Queensland coal producers.

KEVIN'S CORNER MINE APPROVED

Queensland Deputy Premier Jeff seeney has announced the Coordinator General's approval of Hancock Galilee's Kevin's Corner Coal mine in Queensland's Galilee Basin. The Kevin's Corner project will consist of two open-cut mine areas, three underground mine areas, coal handling and preparation facilities and other associated infrastructure and is expected to produce up to 30Mtpa. Among the CoordinatorGeneral's recommendations are those relating to the effective management of water resources through monitoring and assessment programs, with the draft Environmental Authority requiring that the best environmental management practices take place on the mining lease.

INDIAN CABINET ALLOWS POWER COMPANIES TO PASS ON COST OF FOREIGN COAL

Following a recent indian Cabinet decision, indian power companies will now be allowed to pass on the cost of imported coal to customers. GVK Power's chief financial offer isaac George has described this decision as a "very, very positive development" in light of the high number of power producers who have had to resort to foreign coal due to domestic supplies not meeting demand. With over half of india's power being generated by burning coal, increases in both coal imports and power generation investment are likely. Following the indian Cabinet's decision, shares in GVK, Tata Power, Adani Power and other power companies rose.

INDIAN COAL PRICING POWERS VESTED WITH REGULATOR

Further to our story in the June 2013 edition of the Australian Mining Sector Update, the Indian government has vested coal pricing powers with the proposed Coal Regulatory Authority. The powers granted to the regulator include those relating to the supply and quality of coal, as well as a pass-though pricing mechanism in which the price of coal supplied to thermal power generating companies will account for the price of coal from international and domestic mines. Further, the regulator will assume the role of arbitrator in relation to fuel supply agreements between coal producers and thermal power companies, stipulate guidelines for price reviews and administer the trade and allocation of coal reserves for standalone and captive mines. The Coal Regulatory Authority Bill will to advance to Parliament following the Cabinet's approval.

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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Australia: Mining Sector Update: July 2013 Edition