Australia: Mining Sector Update: October 2013 edition

Introduction

Welcome to the October 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 27 September 2013, ASX-listed minerals exploration, development and mining company Inova Resources released its target's statement in relation to China's Shanxi Donghui Coal Coking & Chemicals Group's off market takeover offer for all of Inova's shares at a price of A$0.22 per share. Shanxi Donghui's takeover offer, which was announced on 21 August 2013, is subject to a 51% minimum acceptance condition, as well as obtaining FIRB and Chinese regulatory approvals. Inova's majority shareholder Turquoise Hill Resources (who owns 56.1% of Inova's shares) has entered into a pre-bid agreement with Shanxi Donghui through its wholly owned subsidiary IAL. Under the prebid agreement, Turquoise Hill has agreed to procure that IAL accept Shanxi Donghui's takeover offer in respect of 14.9% of the shares in Inova by no later than five business days after the day on which Shanxi Donghui declares or announces that all conditions are satisfied or waived (excluding the 51% ownership condition), and unless a superior offer from a third party emerges which is not matched by Shanxi Donghui. Turquoise Hill has also advised that, unless a superior proposal emerges, it intends to procure IAL accept Shanxi Donghui's takeover offer in respect of all its other shares in Inova. In the absence of a superior offer, Inova's Independent Directors and Managing Director have recommended to shareholders that they accept Shanxi Donghui's takeover offer at the time the offer becomes unconditional and Turquoise Hill has accepted for all of its shares. Unless extended, Shanxi Donghui's offer is open until 14 October 2013. Inova has appointed Corrs to advise on the takeover offer.

ASX-listed diversified energy company New Hope Corporation announced its senior management transition plans on 12 September 2013. Chief Financial Officer Shane Stephan will be appointed as New Hope's new Chief Executive Officer following the retirement of current CEO and Managing Director Robert Neale at the end of January 2014. Mr Stephan has in excess of 25 years experience in the coal mining industry, having previously held senior management roles at Macarthur Coal, as well as previously being a District Inspector of Mines. Mr Neale has been with New Hope since 1996 and during that time, the company's market capitalisation has increased from A$495 million at its ASX listing in September 2003, to approximately A$3.5 billion.

On 13 September 2013, ASXlisted Coalbank announced that Treasure Wheel Global has made a proportional takeover bid for 75% of the ordinary shares in Coalbank. The proportional bid has been made in relation to Coalbank shares on issue at the date of the offer, and does not cover any Coalbank shares issued following the offer. Treasure Wheel Global's proportional bid is open during the period of 12 September 2013 to 31 October 2013, subject to any extension or withdrawal.

ASX-listed Rio Tinto announced the loading of the first shipment of iron ore from its 290 Mtpa expansion programme on 2 September 2013, ahead of the original schedule and within budget. The 290 Mtpa expansion entails port, rail and mine operations throughout Australia and Rio Tinto's Iron Ore Chief Executive Officer Andrew Harding has stated that the project is the largest integrated mining project in the country. The second stage of the expansion programme is anticipated to increase capacity to 360 Mtpa and will include port, rail and power infrastructure.

On 20 September 2013, ASXlisted Western Desert Resources announced that it intends to raise gross proceeds of A$30 million by issuing over 46 million new ordinary shares to sophisticated and institutional investors at an issue price of A$0.65 per share. This share placement will be conditional upon shareholder approval, intended to be sought at the next annual general meeting planned for November 2013. Further, existing shareholders in the company will be offered the chance to subscribe for up to A$15,000 worth of new Western Desert Resources shares under a share purchase plan, also at an issue price of A$0.65 per share. Western Desert Resources will cap the amount to be raised via the share purchase plan at A$15 million. The equity raised from both the share placement and share purchase plan will replace funding that was going to be contributed by Noble Resources under a revolving credit facility. Ord Minnett was the lead manager and bookrunner of the company's share placement.

In a further announcement by ASXlisted Western Desert Resources on 6 September 2013, the company announced it has executed an agreement with Macquarie Bank for the provision of all remaining project debt finance for the Roper Bar iron ore mine. Funds from the debt facility will enable the completion of the first stage of direct shipping ore (DSO) grade mining operations for the Roper Bar project, located in the Northern Territory. Western Desert Resources has stated that it expects first shipment from the project within 90 days.

ASX-listed coal miner Bandanna Energy announced on 23 September 2013 that it has executed a nonbinding heads of agreement with Korean electricity generator Korea Midland Power Co (KOMIPO) in relation to the Springsure Creek thermal coal mine project. The agreement proposes a potential equity investment by KOMIPO into the project, as well as a long term coal offtake arrangement, however is subject to due diligence by KOMIPO. Bandanna Energy's Managing Director Michael Gray has stated that the company is also participating in active discussions with other potential customers and investors regarding opportunities in the Springsure Creek project.

On 2 September 2013, ASX-listed iron ore miner Centrex Metals announced that it has signed a memorandum of understanding (MOU) with China's Wuhan Iron & Steel (Group) Co (WISCO) in relation to the Eyre Iron Magnetite Joint Venture in which Centrex holds a 40% interest. The MOU proposes delaying the development of the Fusion iron ore project located in South Australia due to changing market conditions. Centrex and WISCO have agreed in principle to commence further magnetite exploration at new deposits within the Fusion project, therefore moving the project back into a Prefeasibility Study to assess potential expansion. The parties intend to jointly contribute a further A$10 million to fund the completion of the Prefeasibility Study, after which Centrex and WISCO will seek a funding solution to cover the project's Bankable Feasibility Study. The two options set out in the MOU are to either incorporate the JV via an IPO to raise funds (with WISCO underwriting any shortfall up to 25% of the issued capital and Centrex's interest being reduced to no less than 30% of the post IPO company), or to have both parties work together to secure a third party investor to provide the required funds for the Bankable Feasibility Study. Centrex has also agreed in principle to relinquish its entitlement to resource incentive payments under the original JV agreement should one of these new funding solutions be pursued. The key amendments set out in the MOU are anticipated to be incorporated into a binding supplementary deed still to be negotiated and executed by the parties.

On 19 September 2013, ASX-listed civil contractor NRW Holdings announced it has executed an agreement with Samsung C&T Corporation for rail earthworks between the Roy Hill iron ore mine site and Port Headland in Western Australia. Under the A$620 million contract, NRW will build approximately 330 kilometres of main line heavy haul rail formation, as well as sidings, level crossings and associated works. Initial construction is anticipated to commence before the end of September 2013, with the project expected to be completed by January 2015.

Recently completed deals

On 6 September 2013, ASX-listed BC Iron announced that its founding shareholder Consolidated Minerals has divested its entire 23.1% interest in the company by selling all of the ordinary shares it held in BC Iron. The 28.5 million shares were sold at a price of A$3.90 per share via a bookbuild to high quality institutional investors. The settlement of the share sale took effect on 11 September 2013. The Australian Financial Review has reported that BC Iron's Managing Director Morgan Ball has stated that the company may be less vulnerable to potential takeovers following Consolidated Minerals' exit due to the fact that now no single shareholder holds more than a 10% interest in BC Iron.

ASX-listed Iron Ore Holdings announced on 4 September 2013 that it has concluded a transaction for the sale of a group of North Marillana tenements to Maiden Iron. The group of tenements divested consists of the 'Extension Tenements' (four mining leases) and the 'Breakaway Tenements (two exploration licences). Under the agreement, Maiden Iron will pay A$2.5 million cash upfront to Iron Ore Holdings to acquire the Extension Tenements, as well as to secure a 12 month option over the Breakaway Tenements. Following production at the Extension Tenements and the Breakaway Tenements option being exercised, Maiden Iron will pay an additional A$5.25 million to Iron Ore Holdings. Iron Ore Holdings will also receive up to a 2.5% FOB iron ore price royalty for all iron ore produced from the tenements. Maiden Iron has agreed to cover all expenditure obligations during the 12 month Breakaway Tenements option period, and if that option expires without having been exercised, the tenements will return to Iron Ore Holdings unencumbered. The group of tenements are located in Western Australia's Central Pilbara region and the Additional Tenements have a JORC Indicated Resource of 15.6 Mt at 54% Fe.

Market rumours and opportunities

According to the Australia Financial Review, AMCI may seek to sell its 24.5% interest in the West Pilbara iron ore project due to current financial obstacles the company is facing, which include a US$159 million legal dispute with Steel Authority of India. ASX-listed Aquila Resources holds a 50% interest in the West Pilbara iron ore project, while Korean steelmaker Posco owns the remaining 25.5% interest. Reportedly, progress on the project has been on hold for over 12 months after the parties referred a dispute regarding the 2013 financial year budget to arbitration when it could not be resolved amongst themselves. AMCI's interest is valued at approximately A$7.4 billion and both Aquila and Posco are reported to be interested in its acquisition.

Mergermarket has reported that ASX-listed coal miner Carabella Resources may finalise a project funding partner by the end of 2013 for its wholly owned Bluff project located in Queensland's Bowen Basin. Reportedly, Carabella is negotiating with several interested parties, considering funding options such as offtake agreements, project level interests and debt financing, with a deal anticipated to be finalised by early 2014 at the latest. The Bluff project is is expected to produce 1.2 Mtpa during its 10 year mine life. Total reserves at the project have increased by 3.3 Mt to 21.5 Mt and Carabella reportedly expects to commence mining in the first half of 2014. A large amount of interest in the Bluff project is said to have come from Chinese and Indian parties.

Glencore Xstrata has put its A$7 billion Wandoan coal project on hold following a statement by Chief Executive Office Ivan Glasenberg that all of the company's greenfield projects have been de-prioritised. The Business Spectator has reported that Mr Glasenberg has flagged his preparedness to sell the company's greenfield projects if offers favourable to Glencore Xstrata are received, but would otherwise hold onto them provided their maintenance costs weren't too expensive. Other Australian coal projects shelved by Glencore Xstrata include the Pentland and Suram projects in Queensland, as well as the Running Stream project in New South Wales.

The Australian Financial Review has reported that after putting the sale of non-core assets on hold to pursue the divestment of The Pilbara Infrastructure (TPI), ASX-listed iron ore miner Fortescue Metals may resume the sale following repeated speculation of the cancellation of TPI's sale. Amongst Fortescue Metals' non-core assets are villages, airports and power stations.

Fortescue Metals is reportedly considering asset sales in order to reduce its current debt.

Mergermarket has reported that China state-owned Shaanxi Coal & Chemical Industry is participating in discussions with coal miners in Australia regarding potential coal asset acquisitions. Reportedly, assets that would be of interest to Shaanxi include coal deposits with proven reserves in excess of 700 Mt and the company may hire Australian counterparts to advise on potential targets. After receiving approval from the China Securities Regulatory Commission for an initial public offering (IPO) on the mainland A-share market in 2011, Shaanxi has delayed listing twice reportedly due to poor market conditions. However, according to speculation, Shaanxi may recommence its listing plans in October 2013. In 2012, Shaanxi reported revenue of CNY125 billion and reportedly has a war chest of US$323 million to use towards its potential acquisition of coal assets abroad.

In similar news, Mergermarket has reported that China state-owned coal mining company Sichuan Coal Industry is also seeking to purchase coal assets in Australia. Sichuan is reportedly considering appointing an advisor to assist with any acquisition and welcomes approaches by advisors with any suitable targets. Sichuan is said to be interested in assets with proven reserves in excess of 500 Mt which have access to both roads and electricity supply. Reportedly, Sichuan has a war chest of approximately US$163 million but may consider approaching Industrial Bank if additional funds are needed for a larger acquisition, and anticipates a deal to be completed by December 2014.

According to the Australian Financial Review, India's Lanco Infratech anticipates finding an investor for its subsidiary Griffin Coal before 2014 in order to assist in the development of port facilities at Bunbury in Western Australia. Once constructed, the coal storage and loading facilities will enable Lanco to export 15 Mtpa of coal. Further to our story in the August 2013 edition of the Australian Mining Sector Update, Griffin Coal only just avoided liquidation recently, with Lanco having paid the A$13.9 million tax debt owed by Griffin Coal to the Australian Taxation Office (ATO).

Further to our stories in the August and September 2013 editions of the Australian Mining Sector Update, the Australian Financial Review has reported that ASX-listed Yancoal's shares are trading at a significantly lower price than the value implied by controlling shareholder Yanzhou Coal Mining Company in its privatisation proposal. The fact that this price inconsistency has not affected Yanzhou's offer reportedly adds further support to the existing doubt that the takeover will complete.

According to Mining Weekly, India's largest power producer NTPC is seeking equity investment in overseas coal assets in order to supply the company with an imported coal source and enable NTPC to participate in the bidding process for the ultra-mega power plants (UMPPs) being established throughout the country. Each UMPP has a minimum capacity of 4,000 MW, with four projects having already been awarded and an additional three UMPP bid processes anticipated to open before the end of September 2013. Reportedly, NTPC has an approximate A$2.75 billion in free cash reserves to leverage towards the funding of any potential equity investment abroad.

Regulatory updates

MINERAL RESOURCES REGULATION 2013 (QLD)

The Mineral Resources Regulation 2013 (Qld) repeals the Mineral Resources Regulation 2003 (Qld), making amendments to the administration of royalties under the Mineral Resources Act 1989 (Qld). Among other changes, the Regulation:

• allows the Minister to stipulate an earlier date for lodging returns where it is deemed necessary for the protection of public revenue;
• clarifies the operation of the gross value royalty provisions by specifying when a person will be required to obtain a gross value royalty decision; and
• increases the consumer price index rate of 3.5% to payable rent, but does not materially change the formula for working out royalty liability.

The Regulation commenced on 1 September 2013.

Other news

STRONG DEMAND FOR AUSTRALIAN IRON ORE EXPORTS

According to Mining Weekly, the demand for shipments of Australian iron ore remain strong, with iron ore ranking as the country's single largest export source, earning approximately A$60 billion in a 'good year'. Exports from Port Headland, which handles iron ore from ASXlisted companies including BHP Billiton, Fortescue Metals and Atlas Iron, have increased 9% from July 2013 to August 2013. Overall, iron ore exports have risen 33% from August 2012, with these volumes expected to continue on an upward trend due to significant investments in the expansion of production at multiple Australian mines. Australia is the largest supplier or iron ore to China, ahead of Brazil.

DAUNIA COAL MINE OPENS IN QUEENSLAND

BHP Billiton Mitsubishi Alliance's (BMA) open cut, metallurgical Daunia coal mine has been officially opened, with construction having been completed four months ahead of schedule. Daunia is expected to produce 4.5 Mtpa of semi-hard coking coal and PCI for its estimated 21 year mine life. ASX-listed BHP Billiton's Coal President Dean Dalla Valle stated that over the past three years, BMA has committed approximately A$9.1 billion in Queensland projects including Daunia, Caval Ridge mine, the Hay Point Coal Terminal expansion and Broadmeadow mine extension.

ARE THERE 'REAL CHANGES' AHEAD FOR AUSTRALIA'S MINING SECTOR?

The Prime Minister-elect, Tony Abbott, has declared Australia is now 'open for business' with the pledge of 'real change' to bolster Australian business. The promised repeal of the Carbon Tax and the MRRT are particularly significant for the mining industry. But will the promises convert to real changes?

We have prepared a Thinking Piece discussing the Coalition's Energy and Resources Policy which can be downloaded here.

ADANI'S GALILEE TRANSMISSION PROPOSES ELECTRICITY LINE

Adani's Galilee Transmission has proposed the development of a major electricity line to power its planned 60 Mtpa, A$5.9 billion Carmichael coal mine located in central Queensland. Queensland's Deputy Premier and Minister for State Development, Infrastructure and Planning Jeff Seeney has commented that the transmission line will remove current barriers for investment in additional resources and commercial activities in the Galilee basin. The proposed transmission line will be 250 kilometres in length, connecting Powerlink Queensland's substation near Collinsville to the new Galilee substation set to be constructed on Adani's Moray Downs coal project, and will be an open access power line. The construction cost of the transmission line is valued at an estimated A$300 million.

CAPTIVE COAL AND IRON ORE MINING IN INDIA FACES CRITICISM

According to Mining Weekly, the trend of captive mining in India has come under scrutiny with the Indian Mines Ministry deeming the selective allocation of captive iron ore mines to domestic steel producers to be anti-competitive. Further, the Indian Coal Ministry has reportedly announced that it will be 'clamping down' on electricity generating entities found not to be forwarding on the benefits received from captive coal blocks to their customers. This controversial mining policy is said to be increasingly preventing both domestic and foreign players from developing stand-alone projects across the country, due to the unfair advantage being granted to particular existing producers by the allotment of captive mines. Reportedly, the Coal Ministry has requested provincial governments to embed clauses in mining leases to the effect that if power companies fail to comply with contracts regarding the supply and tariffs of power purchase agreements, the mining of the relevant captive coal blocks would be halted or the allotment of those blocks may be revoked.

MONGOLIA PLANS TO REPEAL CONTROVERSIAL FOREIGN INVESTMENT LAW

Mining Weekly has reported that the Mongolian Government is set to consider draft legislation aimed at scrapping a controversial law which limits foreign investment in 'strategic sectors' including mining. The restrictive legislation (Strategic Entities Foreign Investment Law) was originally implemented in early 2012 as an attempt to block Aluminium Corporation of China's bid to acquire a majority interest in a Mongolian coal deposit, but has since had negative effects on foreign investment more broadly. Director of Foreign Investment at Mongolia's Economic Development Industry, Sereeter Javkhlanbaater, has reportedly stated that the new foreign investment legislation would continue to limit acquisitions by foreign state-owned entities, but would apply equally to all sectors, not discriminating between 'strategic sectors' and others. Mongolia reportedly plans on creating an approval board to review proposed acquisitions by foreign state-owned entities, as well as establishing an investment agency tasked with encouraging foreign investment.

DIVESTMENT RULES FOR FOREIGN MINERS IN INDONESIA MAY BE RELAXED

According to Mining Weekly, the rule stipulating that foreign companies must decrease their interest in Indonesian mines to 49% within 10 years of the commencement of production may be relaxed. Reportedly, foreign miners who incorporate both upstream and downstream operations may be entitled to hold larger interests in their Indonesian projects instead of facing the 51% divestment rule, however no particulars in respect of revised rules and regulations have been officially announced. Advancing changes through Indonesia's legislative systems are said to be notoriously slow, but in its recently announced fiscal package, the Indonesian Government noted its intentions to attempt to encourage foreign investment into the country.

INDIA PROPOSES FINANCIAL CORPORATION TO FUND OVERSEAS ENERGY ACQUISITIONS

Mining Weekly has reported that the Indian Government is contemplating establishing a financial corporation dedicated to funding mineral and energy acquisitions abroad, authorised to draw foreign exchange resources from the Reserve Bank of India on a spot basis and raise long-term debt funds from domestic markets. This proposed corporation would offer equity and debt financing to assist Indian Government-owned entities to leverage their balance sheets for potential overseas acquisitions. Reportedly, in June 2013, India's Finance Ministry stated that creating such a sovereign wealth fund would be risky in light of the Government's high current account deficit. Officials from India's Planning Commission have reportedly stated that the Chinese model of acquiring mineral and energy assets overseas is the single largest competitive obstacle to Indian acquisition attempts overseas, due to the fact that they were supported by, amongst other factors, extensive bank financing and Government undertakings.

HOW TO DEAL WITH 'FREE HIT' OBJECTIONS TO MINING LEASE APPLICATIONS

People who object to mining leases in Queensland with no evidence to back up their objections create difficulties for the Land Court and cause mining lease applicants considerable expense. But how should mining companies deal with objections which express concerns without any supporting evidence when they do arise?

We have prepared a Thinking Piece concerning 'free hit' mining lease objections, click here to read.

QUEENSLAND GOVERNMENT PROPOSES TO IMPROVE MINE SAFETY

Queensland's Natural Resources and Mines Minister Andrew Cripps has released the Queensland Mines Safety Framework Regulatory Impact Statement for industry consultation following submissions received to a 2012 consultation paper regarding the review of the State's mine safety and health laws. The Statement outlines proposed reforms to the current legislation, including:

• increasing the number of coal industry safety and health representatives;
• requiring mines to have a single safety and health management system for both company employees and contractors; and
• standardising the management of fatigue, drugs, alcohol and fitness for work across the quarry and coal sectors.

Mr Cripps has stated that while Queensland is recognised internationally for its excellent mine safety record, there is still opportunity to improve. The Department of Natural Resources and Mines will host several forums in mining communities across the State to discuss the proposed reforms and industry stakeholders have 60 days to lodge submissions in response to the Statement.

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.

Most awarded firm and Australian deal of the year Australasian Legal Business Awards	Employer of Choice for Women Equal Opportunity for Women in the Workplace (EOWA)