Australia: Mining Sector update: August 2013 edition

INTRODUCTION

Welcome to the August 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 9 July 2013, ASX-listed coal miner Yancoal Australia announced that it has received an indicative, non-binding takeover offer from its controlling shareholder, Shandongbased Yanzhou Coal Mining Company. Under Yanzhou's proposal, Yancoal will acquire the remaining 22% of Yanzhou's issued shares through a scheme of arrangement in exchange for Yanzhou CHESS Depositary Interests (CDIs). The Australian has reported that obtaining FIRB approval is likely be a major obstacle for the proposal as it contravenes previous FIRB conditions placed on Yanzhou's ownership of Yancoal. Reportedly, during Yancoal's merger with Gloucester Coal in 2012, FIRB stipulated that Yancoal was to remain listed on the ASX, be headquartered in Australia and managed by a majority Australian staff, while Yanzhou was to reduce its interest in Yancoal to less than 70% by the end of 2012. Further, the Australian Financial Review has reported that, in order to acquire a class of special shares for which contingent value rights were negotiated during the Yancoal-Gloucester Coal merger, Yanzhou may have to pay up to A$265 million under the scheme of arrangement. The Australian Financial Review has also reported that Yancoal's second largest shareholder Noble Group is unlikely to sell its approximate 13% interest to Yanzhou without notifying the Yancoal Board prior to any sale. Yancoal has reportedly appointed Blackstone Advisory Partners and Lazard to advise on the Yanzhou proposal, while Noble Group is reportedly being advised by Goldman Sachs.

ASX-listed iron ore miner Atlas Iron and ASX-listed iron ore miner Altura Mining announced on 8 July 2013 that they are forming a joint venture to develop the Mt Webber DSO Mine located in Western Australia's Pilbara region. Under the joint venture, Atlas Iron will operate and manage the Mt Webber Mine holding a 70% interest, while Altura Mining will hold the remaining 30% interest. Mining operations at the Mt Webber Mine are expected to commence in the months following December 2013, with first shipment targeted for the end of June 2014. Initial production at the Mt Webber Mine is expected at a rate of 3 Mtpa, with scope to ramp up to 6 Mtpa in subsequent stages. The estimated capital cost of the Mt Webber mine is A$146 million.

On 4 July 2013, ASX-listed iron ore miner Flinders Mining announced that it has executed a non-binding Memorandum of Understanding (MOU) with ASX-listed iron ore miner Brockman Mining Australia in relation to the development of their respective iron ore projects located in Western Australia's East Pilbara region. Flinders Mining wholly owns the Pilbara Iron Ore Project, while Brockman wholly owns the Marillana Iron Ore Project and the Ophthalmia Iron Ore Project. Under the MOU, Flinders Mining and Brockman will work in good faith towards an Aggregation Agreement regarding each party's iron ore interests and export targets, which may include infrastructure and transportation resolutions between the two parties.

In related news, on 2 July 2013, Brockman announced that it has entered into a binding Relationship Agreement with ASX-listed rail network owner and operator Aurizon Holdings. Under the three year Relationship Agreement, Aurizon Holdings and Brockman will work together to develop and implement rail haulage and port solutions for Brockman's Marillana and Ophthalmia Iron Ore Projects.

Further to our story in the July 2013 edition of the Australian Mining Sector Update, on 2 July 2013, ASX-listed Gindalbie Metals announced that its joint venture partner Ansteel contributed A$84 million in cash to the jointly held Karara Project under the recent restructure and funding arrangement between the two parties. This payment represents the first injection of bridging finance that Ansteel will provide in order to cover the Karara Project's cash obligations for the coming year, eliminating Gindalbie's requirement to supply any further equity capital throughout the same period. Further, Gindalbie also announced that a reference benchmark pricing index has been settled with Ansteel for the first year of magnetite concentrate sales by the Karara Project. While Ansteel is required to buy 70% of the magnetite concentrate produced by the Karara Project under the sales agreement with Gindalbie, Karara Mining has now negotiated the right to sell the remaining 30% to unrelated third parties during the first year.

On 1 July 2013, ASX-listed coal miner Rey Resources announced that it has entered into an agreement with Hong Kong-based private investment company Crystal Yield Investments to sell the Duchess Paradise Coal Project located in Western Australia's Canning Basin. Under the Share Sale Agreement dated 30 June 2013, Crystal will acquire all of the issued shares in Blackfin, a wholly owned subsidiary of Rey Resources, in three stages for a total price of up to A$21 million. The assets of the Duchess Paradise Coal Project consist of four exploration licences, a mining lease application, a miscellaneous application, a sublease with the Derby/West Kimberley Shire at the Port of Derby, as well as associated infrastructure at the Port of Derby. Upon completion of the sale, Rey Resources is anticipated to record a book loss of A$480,000, while also reducing its exploration expenditure by approximately A$2 million over the coming year. The sale is conditional on shareholder approval, satisfactory due diligence, FIRB approval and Rey Resources restructuring its assets so that Blackfin's sole assets are the Duchess Paradise Coal Project assets.

ASX-listed BHP Billiton announced on 20 June 2013 that it has entered into an agreement whereby Japan's ITOCHU Corporation will acquire an 8% interest and Japan's Mitsui & Co will acquire a 7% interest in BHP Iron Ore Jimblebar, BHP Billiton's wholly owned subsidiary which holds the Jimblebar Iron Ore Mine located in Western Australia's Pilbara region. Under the agreement, ITOCHU will invest approximately US$0.8 million in shares and loans, while Mitsui will invest approximately US$0.7 million. Once completed, the Jimblebar Iron Ore Mine will be a large scale but low cost open pit mine with an anticipated initial production of 35 Mtpa and scope to ramp up production in the future. BHP Billiton, ITOCHU and Mitsui have a longstanding relationship, and are also developing the Mt Newman, Yandi and Mt Goldworthy Iron Ore Projects in Western Australia together. The Jimblebar agreement is expected to be completed before the end of 2013 following FIRB approval.

RECENTLY COMPLETED DEALS

Following our story in the June 2013 edition of the Australian Mining Sector Update, on 11 July 2013, ASX-listed iron ore miner Western Desert Resources announced that it has successfully completed a share placement to sophisticated and institutional investors, raising A$17.4 million from the issue of 31.6 million new ordinary Western Desert Resources shares at a price of A$0.55 per share. The proceeds from the share placement will go towards developing the Roper Bar Iron Ore Project in the Northern Territory. Western Desert Resources is also currently involved in securing project finance for the remaining capital requirement of the project, with the Directors of Western Desert Resources conveying their confidence that this process will be completed by late 2013. The Commonwealth Bank of Australia is advising Western Desert Resources on its project finance.

MARKET RUMOURS & OPPORTUNITIES

Further to our stories in the April, May and July 2013 editions of the Australian Mining Sector Update, the Australian Financial Review has reported that ASX-listed iron ore miner Fortescue Metals may not proceed with the sale of its minority interest in The Pilbara Infrastructure (TPI). Following Fortescue Metals' recent announcement of its improved financial position, coupled with iron ore prices remaining relatively steady throughout the year, Fortescue Metals will reportedly only commit to a sale of TPI that promises fair and favourable value. Lance Hockridge, CEO of ASX-listed rail network owner and operator Aurizon Holdings, has confirmed that Aurizon Holdings is not involved in TPI's sale. Any deal in relation to TPI is reportedly not expected before September 2013.

Following our story in the July 2013 edition of the Australian Mining Sector Update, the Australian Financial Review has reported that ASX-listed Whitehaven Coal may attract new takeover attention following the sale of Nathan Tinkler's 9.91% interest to Farallon Capital Management. China's Shenhua and Yancoal have been reportedly noted as potential interested parties, although Farallon has denied speculation that it is looking to exit Whitehaven Coal.

Following our story in the May 2013 edition of the Australian Mining Sector Update, MiningNewsPremium has reported that ASX-listed BC Iron is reportedly looking to Western Australia's Pilbara region for opportunities to support its growth strategy. Managing Director of BC Iron, Morgan Ball, has reportedly commented that BC Iron is ideally seeking smaller direct shipping ore projects with capacity of around 2 Mtpa that require lower capital investments and is cautious of any projects lacking connected infrastructure solutions.

The Australian Financial Review has reported that Morgan Stanley and PwC have been appointed as advisors to the New South Wales Government for the sale of the Newcastle Port. Reportedly, interested parties in the Port's sale include ASXlisted rail freight and port operator Asciano, ASX-listed wealth management fund AMP, global asset manager Brookfield, Europe's Borealis, India's Adani and Singapore investment company Temasek. New South Wales Treasurer Mike Baird is reportedly seeking a quick sale of the Port, anticipating a deal to be completed by June 2014. The Port is reportedly valued at A$700 million.

Mergermarket has reported that China state-owned conglomerate Guizhou Panjiang Investment Holding is actively pursuing coal project acquisitions in several countries including Australia as part of it strategy to become South China's largest coal and coal-related company. Guizhou is targeting coal deposits with proven reserves in excess of 50 Mt that have existing operational infrastructure and reportedly anticipates completing two transactions by the end of 2013. Reportedly, Guizhou has approximately US$326 million to use towards any acquisitions and representatives of the company are reportedly intending to visit Australia later in 2013 to investigate potential targets. PanChina CPA is reportedly advising Guizhou in relation to these plans.

In related news, Mergermarket has reported that China state-owned mining and exploration company China National Administration of Coal Geology (CNACG) is also actively seeking coal assets in countries including Australia. Despite CNACG having not yet hired financial or legal advisors, the company is reportedly open to proposals of potential targets. CNACG is reportedly pursuing coking coal and thermal coal assets in excess of 5500cal/kg. Junior miners who currently hold coal projects in early stages of development reportedly represent prime targets for acquisition, while CNACG may also consider joining with local players to form strategic partnerships to invest and develop Australian coal assets. ASX-listed coal miners Carabella Resources and Bandanna Energy have both been reportedly named as potential targets for CNACG. CNACG reportedly has approximately US$100 million to contribute towards coal acquisitions over the next 12 months.

Further to our stories in the April, May and July 2013 editions of the Australian Mining Sector Update, the Beijing Times has reported that China Minmetals and Shenhua Group have refuted rumours that they have submitted bids for the acquisition of ASX-listed Rio Tinto's majority interest in Iron Ore Co. of Canada (IOC). Mergermarket has reported that India's Aditya Birla, China's Fonsun Group, Canadian pension funds Caisse de dépôt et placement du Québec and Canadian Pension Plan Investment Board (CPPIB), private equity group Blackstone and GlencoreXstrata are all still among the potential bidders, while Vedanta Resources has reportedly left the sale process. According to the Wall Street Journal, both Caisse de dépôt et placement du Québec and CPPIB are scouting for large institutional investors to join as partners in their respective bids for the IOC interest. Mergermarket has reported that any potential bidders are yet to approach Labrador Iron Ore Royalty Corporation, a 15% shareholder in IOC who possesses a first right of refusal on any share sale in IOC. Mergermarket has also reported that, if Rio Tinto is unable to receive its reported US$3.5 billion target price for its IOC interest, it is likely to abandon the sale process rather than accepting a lower price.

MiningNewsPremium has reported that Singapore based AusGroup has commenced legal proceedings against Karara Mining in the Western Australia Supreme Court for A$54 million of alleged outstanding payments for work completed in relation to the Karara Iron Ore Project. In March 2012, AusGroup's subsidiary AGC was appointed as contractor for the Karara Iron Ore Project in an agreement valued at A$160 million. According to the writ filed by AusGroup, Karara Mining has reportedly failed to pay progress payments totalling approximately A$43.5 million, in addition to failing to acknowledge a further A$11.2 million in performance incentives for target milestone dates having been achieved during the construction process. An interim injunction was granted by the Court which prevents Karara Mining converting a A$8.8 million performance security bank guarantee into cash prior to any further decisions by the Court in relation to this matter. Karara Mining has reportedly announced that it will defend the claim on the ground that AGC failed to perform under the terms of the contract.

Acording to the Australian Financial Review, after neglecting an unpaid tax debt of A$13.9 million owed to the Australian Taxation Office (ATO), Griffin Coal is on the brink of liquidation. In March 2013, the ATO reportedly allowed Griffin Coal, a subsidiary of India's Lanco Infratech, 21 days to either settle the tax debt or provide a guarantee of its payment. Having reportedly received neither from Griffin Coal, the ATO has now commenced insolvency proceedings in the Federal Court to recover the debt, appoint a liquidator and to wind up Griffin Coal.

REGULATORY UPDATES

QUEENSLAND STAMP DUTY EXEMPTIONS FOR FARM-INS

In 2012, the Queensland Government changed the law in Queensland to make transfers of Exploration Permits dutiable, but announced that farm-ins would be exempted from duty. Pending the finalisation of the exact details of the exemption, the Office of State Revenue (OSR) did not require farm-in agreements to be lodged for stamping in the meantime.

Although the law has still not yet been changed to implement the farm-in exemption, the Commissioner of State Revenue has recently issued Public Ruling DA000.12.1, in which he states that the exemption for farm-in agreements will be administered in accordance with the administrative arrangements set out in the Ruling. The OSR has also updated the Information Sheet "Changes announced to the duty treatment of prospecting and exploration permits and authorities" to reflect Public Ruling DA000.12.1.

Transactions in relation to exploration authorities (which include EPCs) are only liable for duty on or after the "start time". The "start time" (as defined in the Public Ruling DA000.12.1) is 10:30 am on 13 January 2012. Importantly, the Information Sheet now states that the OSR requires certain past farm-in agreements to be lodged for assessment by 6 September 2013, regardless of whether they qualify for the farm-in exemption.

Public Ruling DA000.12.1 can be viewed here, and the Information Sheet related to Public Ruling DA000.12.1 can be viewed here.

QUEENSLAND REPEALS RA 394

On 28 June 2013, Restricted Area 394 (RA 394) was repealed via a Queensland Government Gazette notice.

Prior to the competitive tendering process for EPCs introduced in March 2013 by the Mines and Other Legislation Amendment Act 2013 (Qld), RA 394 was declared over all of Queensland as a temporary measure to prohibit the grant of new coal tenements.

Now that the competitive tendering process is in place, RA 394 is no longer necessary and EPCs can now be applied for and granted under the legislative processes outlined in Chapter 4, Part 3 of the Mineral Resources Act 1989 (Qld). Further, a prospecting permit can once again be used to fill the 'gaps' in an EPC or to allow a third party to apply for a mining lease with the consent of the holder of an underlying EPC or MDL.

The new Operational Policy 'Applying for a mining lease for coal with a prospecting permit' can be viewed here.

OTHER NEWS

QUEENSLAND CUTS RESOURCES RED TAPE

Queensland Deputy Premier and Minister for State Development, Infrastructure and Planning Jeff Seeney has announced that red tape relating to major resources projects in Queensland will be significantly reduced to encourage investment in the State's resources. The new Managing the Impacts of Major Projects in Resource Communities framework streamlines the environmental impact statement (EIS) process and, through a new risk-based generic terms of reference (TOR) scheme developed by the Coordinator-General and Department of Environment and Heritage Protection, cuts the TOR requirements from 100 pages to 25 pages. Overly prescriptive and duplicative requirements have been done away with in the EIS process to enable a resources project proponent to give greater focus on the critical matters. Mr Seeney has emphasised that, while the paperwork has been condensed, the same environmental standards regulating resource development remain to ensure protection of the environment.

WESTERN AUSTRALIA'S IRON ORE EXPANSIONS SAFE

Western Australia Premier Colin Barnett has stated that he is confident that iron ore expansion programs including those of ASX-listed BHP Billiton, ASX-listed Rio Tinto, ASX-listed Fortescue Metals and Gina Rinehart's Roy Hill will all be successfully completed despite China's recent reduction in steel production. Mr Barnett has confirmed that he recognises export demands will "plateau out" in the near future, but also highlighted that China and other Asian countries such as Japan will still represent a significant market for iron ore. Recent statistics reveal that growth in Western Australia remains solid at 6.7% in 2012, approximately A$100 billion of mining and petroleum exports occurring and an additional A$177 billion worth of committed resource projects in the State.

MAXIMUM PENALTY POSSIBLE FOR WHITEHAVEN HOAXER

Anti-coal activist Jonathan Moylan faces a maximum penalty of 10 years imprisonment and up to a A$495,000 fine after being charged by ASIC with one count of making false and misleading statements under the Corporations Act 2001 (Cth). In January 2013, Moylan's hoax stating that the ANZ Bank had withdrawn a A$1.2 billion loan facility from ASX-listed Whitehaven Coal's Maules Creek Coal Project caused Whitehaven Coal share prices to temporarily drop by A$314 million. Moylan is due to appear in Court later in July 2013.

QUEENSLAND DRAFT REGIONAL PLAN PRAISED BY MINING INDUSTRY

Following its release at the end of June 2013, the Queensland Government's draft Regional Plan for the Darling Downs has been welcomed by the mining industry. Both the Queensland Resources Council (QRC) and the Association of Mining and Exploration Companies (AMEC) have supported the draft Regional Plan, acknowledging the opportunity for productive co-existence between the agricultural and mining sectors. The draft Regional Plan seeks to identify and prioritise "priority agricultural areas" (PPAs) by requiring mining companies who wish to operate within such areas for more than 12 months to show that no material loss of land, no threat to continued agricultural land use and no material impact on overland flow and aquifers will occur as a result of their mining activities. Buffers around towns have also been included in the draft Regional Plan to exclude mining within those confines, however the relevant local council can elect to expand or reduce its buffers upon obtaining Queensland Government approval.

WESTERN AUSTRALIA REHAB FUND COMMENCES

A new mining rehabilitation fund implemented by the Western Australian Government began on 1 July 2013, replacing the existing environmental bonds system. In contrast to the former bonds system which only allowed funds to be used on the tenement for which they were lodged, contributions to the new fund are available for use on any site the contributing party holds, while interest from the fund is available for clean up efforts on legacy sites. Despite it only being compulsory to join the new fund by July 2014, over 370 tenement holders have already reportedly signed up, with ASX-listed iron ore miner Pluton Resources and ASX-listed minerals explorer GunsonResources being the first two companies to opt-in to the fund. Tenement holders must declare the number of hectares their operations will disturb, as well as the type of disturbance, and a levy will be determined on a per tenement basis with contributions commencing at approximately 1% per year and gradually increasing over time. The fund is intended to promote progressive rehabilitation.

THE BUILDING REVOLUTION OF BIM

A technological revolution is changing the way large projects are being built and managed in advanced countries in North America, Europe and Asia. Governments and private owners are turning to Building Information Modelling (BIM) to deliver projects at a lower cost and as well as to operate them more profitably. To date, Australia has been slow to adopt BIM, but we cannot afford to lag behind.

We have prepared a Thinking Piece discussing BIM in more detail, click here to read.

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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