Australia: Mining Sector Update: September 2013 edition

INTRODUCTION

Welcome to the September 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 16 August 2013, ASX-listed iron ore miner Fortescue Metals announced that Taiwan's largest private company Formosa Plastics has invested US$1.15 billion into the FMG Iron Bridge Joint Venture which is developing the FMG Iron Bridge Project located in Western Australia. The FMG Iron Bridge Joint Venture is currently owned by Fortescue Metals (with an 88% interest) and China's Baosteel (with a 12% interest). Under the recent agreement, Formosa will acquire a 31% interest in the joint venture for US$123 million, as part of its US$1.15 billion investment. Formosa is currently participating in the development of a 22 Mtpa integrated steel mill located in Vietnam which is set to become the largest of its kind worldwide. Following the commencement of that steel mill's production, which is anticipated in 2015, Formosa has also agreed to purchase up to 3 Mtpa of iron ore from the FMG Iron Bridge Project. Underpinned by a combined iron ore resource of 5.2 billion tonnes, first production of 1.5 Mtpa from stage one of the FMG Iron Bridge Project is expected in early 2015, with the construction of the 9.5 Mtpa stage two anticipated to begin in 2015. The transaction is conditional on obtaining approval from FIRB and the Taiwan Investment Commission, which is expected to be received by September 2013.

ASX-listed iron ore miner Flinders Mines announced on 31 July that it has signed a further six binding, non-exclusive Memoranda of Understanding (MOU) with Chinese steel mills for sinter fines product from its Pilbara Iron Ore Project located in Western Australia. Flinders Mines anticipates these MOUs will bring about Letters of Intent with several customers following completion of their technical and commercial assessments of the ore as to its suitability for their steel mill operations. Four other MOUs have been previously signed in relation to the Pilbara Iron Ore Project and Flinders Mines expects further MOUs to be executed over the next few months having approached over 40 Chinese steel mills in total. Flinders Mines has stated that strong expressions of interest have been received, with many steel mills wanting to take delivery of Flinders Mines' iron ore without delay.

MARKET RUMOURS & OPPORTUNITIES

The Australian has reported that ASX-listed BHP Billiton is considering selling the closed Mount Goldsworthy Iron Ore Project located in Western Australia's Pilbara region. Reportedly, Nimbus Mines is the anticipated buyer of the Mount Goldsworthy Project. However, acid contamination uncovered at the Project's site may hold up any transaction, with a clean up bill reportedly estimated to total A$100 million. If Nimbus Mines does acquire Mount Goldsworthy Project, it reportedly intends to reopen the mine.

Further to our story in the August 2013 edition of the Australian Mining Sector Update, the independent directors of ASX-listed coal miner Yancoal may take up to several weeks to consider the privatisation proposal from controlling shareholder Yanzhou Coal Mining Company and to complete its due diligence process. Yancoal's second largest shareholder Noble Group is undertaking its own separate assessment of the proposal, concerning itself with the long term value of the potential transaction. Mergermarket has reported that the Australian Government's lock-down mode under the election campaign means that the Treasurer cannot currently make any FIRB approvals without first consulting with the Opposition.

According to Mergermarket, China's state-owned coal exploration and engineering company China Coal Technology and Engineering Group (CCTEG) is reportedly seeking overseas coal investment opportunities in line with its strategy of expansion abroad. For the previous several years, CCTEG has reportedly been investigating potential targets in several countries including Australia. CCTEG is interested in coal mining and exploration assets in which the company could acquire control, as well as construction projects which would allow CCTEG the opportunity to secure additional construction contracts in the future. With a registered capital of US$570 million and reported access to multiple fundraising sources, CCTEG is believed to be open to approaches of potentially suitable targets despite having not yet appointed financial advisors.

Further to our story in the August 2013 edition of the Australian Mining Sector Update, the Australia Financial Review has reported that Morgan Ball, Managing Director of ASX-listed BC Iron, claims that the company has two desirable opportunities in Western Australia's Pilbara region – to develop a greenfield project or to expand the life of the Nullagine Iron Ore Project. BC Iron currently owns a 75% interest in the Nullagine Project, while ASX-listed iron ore miner Fortescue Metals owns the remaining 25% interest. According to the Sydney Morning Herald, acquiring Fortescue Metal's interest in the Nullagine Project is a logical choice for BC Iron in line with its growth strategy. Morgan Ball has reportedly stated that such a complete buyout would be preferable to BC Iron, however, the company is not desperate for a deal. BC Iron has a market capitalisation of A$458 million.

In other Fortescue Metals news, and further to our stories in the April, May, July and August 2013 editions of the Australian Mining Sector Update, the Australian Financial Review has reported that Fortescue Metals is increasingly likely to abandon the sale of its interest in The Pilbara Infrastructure (TPI). Reportedly, Fortescue Metals is less reliant on the sale as a result of record Chinese imports pushing up iron ore prices and consequently, increasing Fortescue Metal's earnings. The 30 September 2013 deadline remains in place for a buyer of Fortescue Metals' TPI interest to be found.

Further to our stories in the April, May, July and August 2013 editions of the Australian Mining Sector Update, Mergermarket and Newswire Round-up have reported that Apollo Global Management, Canada Pension Plan Investment Board, Blackstone, Glencore-Xstrata and Aditya Birla are all believed to have withdrawn from the sale process of ASX-listed Rio Tinto's majority interest in Iron Ore Co. of Canada (IOC) after making offers which fell short of Rio Tinto's price expectations. Reportedly, China's Wuhan Iron and Steel Group and China Minmetals have formed a consortium and are still aiming to submit a bid for IOC, although no financial advisors have yet been appointed. Teck, along with an unnamed Canadian infrastructure company, is also reportedly still among the potential bidders. Rio Tinto has recently called off the sale processes of it Pacific Aluminium and diamond businesses reportedly due to receiving bids which did not meet its anticipated sale prices. Rio Tinto's CEO Sam Walsh has reportedly stated that the company will make significant divestments over the coming 12 months but that Rio Tinto is "not about to do something silly" and sell assets "just to tick boxes".

According to Mergermarket, ASX-listed Atlas Iron may reportedly reduce its equity interest in its Horizon II development located in Western Australia by up to 40% before the end of 2013. Reportedly, Executive Director of Atlas Iron Mark Hancock has commented that a similar arrangement to that recently agreed to at the Roy Hill Project may potentially be followed in Atlas Iron's sell down. Under such a model, a project equity joint venture could be formed allowing particular joint venture partners to focus on their separate interests in the project's infrastructure or product supply. The Horizon II development is set to increase Atlas Iron's production base to 46 Mtpa, up from 15 Mtpa. Several parties from varying countries have reportedly expressed interest in participating in the Horizon II development.

Further to our stories in the April, May, June and July 2013 editions of the Australian Mining Sector Update, Coal India has reportedly executed further non-disclosure agreements with overseas companies in relation to potential coal asset acquisitions in countries including Australia. India's mint has reported that bankers will soon be appointed by Coal India to undertake due diligence on the asset proposals already received. Additionally, The Hindu has reported that the board of directors of Coal India have already approved the suitability of several targets, including several privately-owned assets in Eastern Australia. Reportedly, one of the potential Australian targets is valued at US$2.5 billion, and the possibility of Coal India forming a joint venture in order to acquire and operate such assets has not been discounted.

OTHER NEWS

GALILEE COAL PROJECT'S ASSESSMENT COMPLETED

On 9 August 2013, the Queensland Coordinator-General released his evaluation report on the environmental impact statement (EIS) on the Galilee Coal Project located in Central Queensland. Following over four years of thorough environmental assessment and public consultation, the Coordinator-General approved the A$6.4 billion mine and rail components of the Project, subject to strict development and operating conditions. The Project will now be the subject of a parallel Commonwealth assessment under the Environment Protection and Biodiversity Conservation Act 1999 (Cth). The Galilee Coal Project, owned by Waratah Coal, is set to include the development of a new coal mine and associated infrastructure near Alpha, as well as a rail line connecting the mine to the Abbott Point State Development Area, and is anticipated to produce 40 Mtpa of thermal coal for export during its 30 year mine life.

INDIA TO IMPORT 82 MILLION TONNES OF COAL DURING 2013/2014

Further to our story in the June 2013 edition of the Australian Mining Sector Update, the Junior Coal Minister of India has announced that Indian power companies are likely to import up to 82 million tonnes of coal during 2013/2014. Of those imports, 50 million tonnes is reportedly required to cover shortfalls from domestic mines. Reportedly, Coal India is intending to float a global tender for 5 million tonnes of coal imports, while India's largest power producer NTPC is similarly expected to float a tender for 5 million tonnes of coal imports within months.

INDIAN GOVERNMENT PLACES RESTRICTIONS ON INDIAN COMPANIES INVESTING OFFSHORE

The Indian Government has reportedly increased restrictions on Indian companies investing in projects abroad, including in both acquisitions and project development costs. Previously, Indian companies could invest up to four times their current net worth in offshore projects, however, under tighter regulations, this figure has been reduced to an investment amount equal to the relevant company's net worth. The reasoning behind this tighter restriction is the consistent devaluation of the Indian Rupee as a result of the escalating Current Account Deficit. Indian companies seeking investment in offshore projects are likely to lobby the Indian Government over the increased restriction, however, the situation is unlikely to change in the short term.

NO OPEN-CUT MINING TO TAKE PLACE IN CHANNEL COUNTRY

The Queensland Government has announced that open-cut mining will not be allowed in the Channel Country of Western Queensland under a new management framework being developed by the Department of Natural Resources and Mines (DNRM). Minister Andrew Cripps has stated that a special Channel Country Protection Area will be introduced as an alternative approach to balancing environmental protection and economic development, replacing the Labour government's Wild Rivers legislation. The Western Rivers Advisory Panel, made up of local government, environmental, indigenous, grazing and resources sector representatives, has produced a report which DNRM will consider and which will form the basis of Minister Cripps' recommendations, expected to finalised by the end of 2013.

FORTESCUE METALS' MRRT CHALLENGED REJECTED BY HIGH COURT

Further to our stories in the June 2012 edition of the Australian Resources Sector Update and the April 2013 edition of the Australian Mining Sector Update, ASX-listed iron ore miner Fortescue Metals has lost its legal challenge of the constitutional validity of the Mineral Resources Rent Tax (MRRT). The High Court unanimously rejected Fortescue Metals' argument that the MRRT was unconstitutional in that it discriminates between states. In its judgment, the High Court ruled that the MRRT did not give preference to one state over another as the rate at which the tax is levied is 22.5%, irrespective of the state in which a miner operates. The High Court noted that it is a matter of a miner's outgoings which vary from state to state, including those for differing state royalties. Fortescue Metals has been ordered to pay the legal costs of the challenge. Coalition leader Tony Abbott has announced that, if elected in September, the Coalition will legislate to abolish the MRRT as of 1 July 2014.

PALMER CHALLENGES THE CARBON TAX REFUSING TO PAY A$6.2 MILLION FINE

On a similar note, The Australian has reported Clive Palmer is challenging the validity of the carbon tax in the High Court, refusing to pay a A$6.2 million penalty imposed by the Australian Government on his Yabulu Nickel Refinery located near Townsville in North Queensland. According to a statement by the Clean Energy Regulator, Palmer's company Queensland Nickel has reportedly failed to comply with the carbon tax legislation, not accounting for thousands of tonnes of greenhouse gas emissions by the 17 June 2013 deadline. Reportedly, Queensland Nickel filed a writ in the High Court in May 2013 arguing that the carbon tax discriminates between states in Australia on the grounds of where business takes place and as such, is unconstitutional. The A$6.2 million fine was due for payment by 24 June 2013, enabling the Clean Energy Regulator to pursue debt recovery processes for the amount owing, plus interest.

NEW CLARITY OF COMPENSATION FOR LANDOWNER TIME

The ongoing debate in Queensland about whether resources companies are required to compensate landowners for the time they spend negotiating compensation agreements may now have come to an end. A recent case in the Queensland Land Court has provided clarity that landowner time, in and of itself, is not compensatable under the legislative regime in Queensland.

We have prepared a Thinking Piece discussing the compensation for landowner time 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.

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)