Australia: Australian Mining Sector Update: May 2015 edition

Introduction

Welcome to the May 2015 edition of the Australian Mining Sector Update, a 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 about recently completed deals, market rumours, potential opportunities and relevant regulatory updates.

Recent announcements

On 23 March 2015, been defined). Idemitsu Australia Resources Pty Ltd announced that its wholly owned subsidiary, Boggabri Coal Pty Ltd, executed a sale and purchase agreement to transfer a 10% interest in the Boggabri Coal Mine to a subsidiary of Nippon Steel & Sumitomo Metal Corporation, the Japanese steel-maker. Located in New South Wales, the Boggabri Coal Mine produces high quality, metallurgical coal and low sulphur, low ash thermal coal with a high calorific value. In 2014, the mine produced around 5.6 million tonnes of coal.

The deal includes an agreement to supply PCI, semi soft coking and thermal coal from Boggabri Coal to Nippon Steel on a long-term basis and is subject to certain conditions including regulatory approvals. This transaction follows the transfer of a 10% interest in the Boggabri Coal Mine to Chugoku Electric Power Australia Resources Pty Ltd last year, a deal which also included the long-term supply of coal from the mine to Japanese parent, Chugoku Electric Power Co., Inc..

As a result of the two transactions, Idemitsu notes that Boggabri Coal will have two major Japanese electricity utility and steel industry customers as joint venturers, providing more stability to Boggabri Coal Mine operations. Further, Idemitsu says that Boggabri Coal plans to expand sales of PCI coal and semi soft coking coal to steel companies throughout Asia, including Japan, in the wake of this long-term supply to Nippon Steel.

On 1 April 2015, KordaMentha was appointed Voluntary Administrator of Tiaro Coal, an Australian resources explorer with a focus on metallurgical coal projects in Queensland. Tiaro Coal's key Australian assets include a 47.6% interest in the Paragon Coal Project in the Maryborough Coal Basin (for which a JORC Resource of 87 Mt has been defined) and a 29.9% indirect interest in the Clyde Park Project in the north eastern edge of the Galilee Basin (for which a JORC Resource of 728.1 Mt has been defined).

Recently completed deals

Singapore-listed Linc Energy announced on 16 February 2015 that it had sold its conventional coal business to United Queensland Resources, part of the United Mining Group. The deal involves the sale of 100% of the shares in Linc's subsidiary, New Emerald Coal, for A$5 million through a share sale agreement. New Emerald Coal will end up holding all Linc's conventional coal assets including the Teresa Project (including its coal export capacity at the Port of Gladstone) and the Pentland and Dalby development projects, as well as agreements to acquire the Blair Athol Coal Mine from the Blair Athol Joint Venture.

Linc will continue to share in the benefits of these projects as they reach production because the existing Revenue Sharing Agreement between Linc and New Emerald Coal will remain in place post-completion. Under this Agreement, Linc receives an indexed US$1.00 per product tonne of coal sold from the Teresa and Pentland projects and an indexed US$0.50 per product tonne of coal sold from the Blair Athol Mine.

As United Mining will be responsible for all future development costs and liabilities, Linc says the transaction means it does not need to direct a significant amount of future capital into its coal business, reportedly creating savings to Linc in excess of A$20 million per annum in administration and existing liability costs alone. Linc says the revenue sharing arrangements with New Emerald Coal also have the potential to earn Linc approximately US$590 million in future revenue generated from coal sales. Further, Linc says the transaction will allow it to continue to focus on its Underground Coal Gasification, shale and conventional oil and gas businesses. The deal is subject to certain conditions precedent, including regulatory approvals and shareholder approval (if required).

United Mining's Managing Director, Gary Williams, reportedly said his company would continue with plans to re-open the Blair Athol Mine and would develop the Teresa project as its next mine into production.

Market rumours and opportunities

Further to our reporting in the January 2015 edition of the Australian Mining Sector Update, a recent article in The Australian suggests that the sale process for Anglo American's Australian coal assets is expected to be launched in May 2015. Reports have previously indicated that the London-based miner is preparing to sell its stake in three Queensland mines (Dawson, Foxleigh and Callide) and one mine in New South Wales (Dartbrook) as part of a global review of its assets. Anglo has engaged Bank of America Merrill Lynch to guide its divestment program.

According to an article in The Australian on 25 March 2015, ASX-listed coal mining company, New Hope Coal, is looking for acquisition opportunities with CEO, Shane Stephan, reportedly saying that the market downturn has created ripe conditions for deal activity. Mr Stephan reportedly said that New Hope was actively pursuing new opportunities and would keep its focus on Australia, but was looking to expand beyond thermal coal into metallurgical coal.

Regulatory updates

PRODUCTIVITY COMMISSION'S REPORT ON GAS ACTIVITIES

The Productivity Commission recently released its research paper "Examining Barriers to More Efficient Gas Markets" which identifies the substantial economic benefits of the industry and supports its growth. Although the paper recognises that the rapid growth of the gas industry has exposed some sharp conflicts between existing landholders, local communities and the gas industry, the Productivity Commission is of the opinion that such conflicts are decreasing as more gas companies have increased their efforts to obtain a "social licence to operate" at an early stage of the development. In addition, the Productivity Commission supports current compensation regimes as the best alternative to deal with land conflicts.

In relation to community concerns about environmental and public health risks of coal seam gas activities that have led to CSG moratoria in Victoria and New South Wales, the Productivity Commission suggests that the risks could be better managed through a welldesigned regulatory regime and better monitoring and enforcement, rather than moratoria. In its opinion, the expected benefits of the moratoria must be weighed against their expected costs which include higher gas prices for users and reduced royalty and taxation revenue for governments. A copy of the Productivity Commission's paper can be found here.

Other news

ABBOT POINT EXPANSION

On 11 March 2015, Queensland Premier, Annastacia Palaszczuk, announced a new agreement between the Queensland Government and Galilee Basin mining proponents, Adani and GVK, to put in place an environmentally sustainable proposal for the expansion of the Abbot Point Coal Terminal. The agreement contemplates dredge spoil from the port expansion being deposited on unallocated industrial land adjacent to the existing coal terminal known as T2.

On 18 April 2015, the Queensland Government announced that it has referred the dredging of Abbot Point to the Federal Government for environmental assessment. In a recent media statement, the Minister for Natural Resources and Mines, Dr Anthony Lynham, said the expansion of Abbot Point "is an essential building block in Queensland's economic development, allowing it to meet export requirements from Galilee Basin projects".

Galilee Basin projects like Adani's Carmichael Coal Mine and GVK's Alpha and Kevin's Corner coal projects and the related port and rail infrastructure reportedly represent a A$21.7 billion investment in Queensland and are expected to create around 9,500 jobs.

BALDWIN V ICON ENERGY – IS AN AGREEMENT TO NEGOTIATE ENFORCEABLE?

It is a well-established principle of contract law that an "agreement to agree" will not constitute a binding contract. The recent Queensland Supreme Court decision of Baldwin & Anor v Icon Energy Ltd & Anor [2015] QSC 12 showcased this principle at work in the resources sector in relation to a Memorandum of Understanding (MOU) under which the parties agreed to "use reasonable endeavours" to negotiate a Gas Supply Agreement (GSA) "in good faith". The Court found that, even though the agreement to negotiate was qualified by the requirement to act "in good faith" and obliged the parties to "use reasonable endeavours", neither of these requirements had a sufficiently certain legal content to be enforceable. As a result, the agreement to negotiate and to act in good faith was not enforceable and the plaintiff could not claim damages for failure to sign the GSA.

Parties should therefore be aware when preparing an MOU, term sheet, heads of agreement or other preliminary document which contemplates the negotiation of a key binding document at a later date, thatthe agreement to negotiate, even where it is qualified by the requirement to act "in good faith" and to "use reasonable endeavours", may not, without more, be enforceable.

The case can be accessed 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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