Australia: Australian Resources Sector Update: January/February Edition

INTRODUCTION

Welcome to the January/February edition of the Australian Resources Sector Update , a monthly publication prepared by Corrs Chambers Westgarth for clients who are interested in the Australian resources industry.

This publication brings together a brief summary of information on recently completed deals, market rumours and potential opportunities, and relevant regulatory updates.

ASX-listed Rio Tinto announced on 17 January 2013 that it expects to recognise approximately US$14 billion of non-cash write downs in aluminium and coal assets in its 2012 full year results. Rio Tinto has further announced that Tom Albanese has stepped down as chief executive officer and will be replaced by Sam Walsh. The Sunday Express has reported that leading shareholders have requested that Rio Tinto conduct a review of its current business strategy.

Following Rio Tinto's announcement, The Australian has reported that Rio Tinto may seek to divest non-core assets in order to stabilise the company after the significant write downs. The Australian has further reported that Rio Tinto has not divested any substantial assets of late, although it currently has various aluminium and other assets for sale. The Australian speculated that Rio Tinto's diamond and energy businesses may be a likely target for divestment, given that they are not a critical aspect of Rio Tinto's business strategy.

The Australian Financial Review further reported that Rio Tinto may be looking to partner with an Indian or Chinese party to fund its Mozambique coal assets. This would reduce both Rio Tinto's risk profile and the burden of export infrastructure. Reportedly, India's Tata Steel currently owns a 35% interest in Rio Tinto's Benga Coal Project in Mozambique.

Hong Kong's Regent Pacific Group announced on 16 January 2013 that it has signed an agreement to divest its 20.1% interest in ASX-listed iron ore miner BC Iron, through a placement, to a number of institutional investors on an underwritten basis at A$3.50 per BC Iron share. The placement will provide Regent Pacific with gross proceeds of approximately A$81.5 million.

Further to our story in the November 2012 edition of the Australian Resources Sector Update, ASX-listed coal miner Bandanna Energy announced on 14 January 2013 that it has now completed its Definitive Feasibility Study along with the capital and operating cost estimates for its A$4.2 billion Springsure Creek Coal Project, located in the Bowen Basin. Bandanna has announced that it is now able to progress the discussions that it has been holding over the past six months with a number of potential joint venture parties for the project. Bandanna confirmed that it has hired JP Morgan as a strategic advisor to assist in finalising the joint venture investment arrangements. Bandanna is aiming to begin coal export to coincide with the completion of Stage 1 of Wiggins Island Coal Terminal in March 2015.

There have been a number of reports in recent months in relation to ASX-listed miner Whitehaven Coal. Nathan Tinkler, who holds a 19.4% interest in Whitehaven Coal, has been reported as having significant liquidity problems. The Australian Financial Review reported that Farrallon Capital, one of Tinkler's key lenders, is continuing to support Tinkler rather than taking control of his stake in Whitehaven Coal. It has been further reported that an unidentified overseas party may be considering making a A$3.50 per share offer for Tinkler's stake in Whitehaven Coal.

Whitehaven Coal announced on 19 December 2012 that it refuted claims made in the Australian Financial Review earlier the same day that Whitehaven Coal had urged China's Shenhua Group to make a full takeover bid for Whitehaven Coal. Whitehaven Coal confirmed that it has held discussions with Shenhua at various times due to the potential synergies between the two companies. However, Whitehaven Coal stated that there have been no proposals from either party to sell their assets or acquire the other party's assets.

It has further been reported in the Australian Financial Review that ASX-listed coal miner New Hope Corporation may be interested in acquiring an interest in Whitehaven Coal. It has been reported that New Hope held A$1.5 billion in cash assets as at July 2012 and has an expected operating cash flow of A$554 million in 2013.

ASX-listed iron ore miner Fortescue Metals announced on 17 December 2012 that it is considering the potential sale of a minority interest in The Pilbara Infrastructure (TPI), a wholly-owned subsidiary of Fortescue and owner of the company's existing rail and port assets. Chief Executive Officer, Nev Power, has stated that there are a number of parties interested in investing in TPI and that discussions are continuing.

It has been reported in the Australian Financial Review that indicative offers for Fortescue Metals' port and rail assets are expected by mid-February and that a deal could be revealed by the end of the first quarter of 2013. It is expected that Fortescue will raise between A$3 billion and A$4 billion from the asset sale, and some analysts believe that such a sale could reduce Fortescue's gross debt by one third and lead to a stock re-rating.

It has been further reported that Fortescue is willing to sell as much as 40% of its rail and port assets into a new joint venture vehicle and would prefer a pension fund or sovereign wealth fund buyer so as to allow Fortescue to retain operating control of the assets.

Fortescue Metals further announced on 12 December 2012 that the iron ore deposits at its Iron Bridge Project have increased by two billion tonnes. The total JORC compliant Resource is now 5.2 billion tonnes at an iron grade of 30.4%. Fortescue announced that the continued expansion aims to achieve significant value for shareholders, and that it believes that the Project has potential to be highly economical due to its deposit size, the core high iron recovery zone, proximity to Fortescue's infrastructure and low-cost shipping to Asia. Fortescue has also announced that it is currently in discussions with parties regarding the sale of a strategic interest in the project as well as equity development funding.

Further to our story in the December 2012 edition of the Australian Resources Sector Update, ASX-listed iron ore miner Sundance Resources announced on 14 December 2012 that the Scheme Meeting, where the Sundance Resources shareholders will vote on the Scheme of Arrangement between Sundance Resources and China's Hanlong (Africa) Mining Investment Limited, has been adjourned to 1 February 2013. Sundance Resources earlier announced on 5 December 2012 that Hanlong has been granted an extension and must now provide the China Development Bank Credit Approved Term Sheet on the last business day prior to the Scheme Meeting. Hanlong has also agreed to provide a convertible note facility for up to A$15 million, to be drawn down to meet Sundance Resources' working capital requirements, which may be converted into fully paid ordinary Sundance Resources shares at either party's option (subject to conditions).

It has been reported in the Sunday Telegraph that Hanlong hopes to complete the acquisition of Sundance Resources by the beginning of March 2013. However, it has been reported in the Australian Financial Review that there are other parties who are still conducting due diligence and that there may be a counter bid made for Sundance Resources. Sundance Resources has stated that, in the absence of a superior proposal, Hanlong's offer continues to be in the best interests of all shareholders.

In 2010, Vale Belvedere (a wholly owned subsidiary of Brazil-based coal miner Vale) exercised its option to acquire BD Coal's (a wholly owned subsidiary of ASX-listed coal miner Aquila Resources) 24.5% interest in the Belvedere Hard Coking Coal Project. On 13 December 2012, Aquila announced that a final valuation report has been received in relation to the determination of the fair market value of Aquila's interest in the project. The fair market value of the interest as at 2 June 2010 was determined to be A$150 million. Aquila has stated that discussions are ongoing as to the settlement of the transaction, and Aquila is seeking to recover its project contributions made since 2010 plus interest.

ASX-listed Cuesta Coal announced on 12 December 2012 that it has executed a Share Sale Agreement to acquire Hannigan & Associates, the holder of the Orion Coal Project, for A$18.2 million. The Orion Coal Project will be consolidated with Cuesta's existing West Bowen Project. Cuesta was required to pay a A$5 million deposit before 21 December 2012 which was intended to be funded through existing cash reserves. The remaining A$13.2 million is due before 28 February 2013 and Cuesta is currently undertaking discussions with Chinese state-owned Beijing Guoli, its major shareholder, to assist in financing the balance. It has been reported that Beijing Guoli is considering other acquisitions in Australia and is likely to use Cuesta as its vehicle. The transaction is subject to FIRB approval. Cuesta has not yet announced whether it has paid the initial A$5 million or has received FIRB approval.

RECENTLY COMPLETED DEALS

On 18 December 2012, it was announced that ASX-listed iron ore miner Fortescue Metals' sale of a 25% interest in the Nullagine Iron Ore Joint Venture to ASX-listed iron ore miner BC Iron completed. As a result, BC Iron's interest in the Joint Venture has increased from 50% to 75%. Through the transaction, the capacity available to the Joint Venture on Fortescue's rail and port infrastructure has been increased to 6 Mtpa. BC Iron obtained a A$47 million underwritten institutional placement and a US$130 million amortising term loan facility in order to finance the deal. Fortescue received net proceeds of A$190 million.

MARKET RUMORS & OPPORTUNITIES

The Australian has reported that Australian coal miner Riversdale Resources plans to list on the ASX. Managing Director, Steve Mallyon, has reportedly stated that the IPO, which will raise approximately A$60 million, is likely to occur before June 2013. Mallyon indicated that Riversdale Resources has requested proposals from a number of banks to lead the IPO.

The Australian Financial Review has reported that an increase in the price of iron ore could provide Canadian miner, Teck Resources, with a reason to sell its 2.94% stake in ASX-listed iron ore miner Fortescue Metals. This speculation follows Teck's failure to reach an agreement with Fortescue in relation to acquiring an interest in Fortescue's Chichester mining assets. It has been reported that Teck is believed to be seeking A$5.50 per share. As at 24 January 2013, Fortescue was trading at $4.67 per share.

The Australian has reported that ASX-listed coal miner Aquila Resources is seeking a co-investor to finance the Eagle Downs Hard Coking Coal Project in Queensland's Bowen Basin. Reportedly, Aquila must pay A$640 million to fund its 50% interest in the project and Brazil's Vale is responsible for the remainder.

The Herald Sun has reported that ASX-listed Whitehaven Coal is prepared to decrease its interest in the Maules Creek Coal Project if a coal client buys into the project. Chief Executive Officer, Tony Haggerty, has reportedly indicated that Whitehaven Coal is willing to lower its interest in the project from 75% to 70%. The other participants in the project are Japan's Electrical Power Development (who acquired its 10% interest in the project from Whitehaven Coal for A$370 million in June 2012) and ICRA MC Pty Ltd (an entity that is associated with Japan's Itochu Corporation), who holds the remaining 15% interest.

It has been reported that Loncin Holdings, a Chongqing-based mining company, plans to acquire iron ore assets located in Australia over the next two years to expand its newly launched mining business. Loncin is reportedly looking for high grade intermediate-stage deposits, and would prefer to acquire a controlling interest in such assets. Loncin reportedly intends to finance acquisitions through a mixture of internal funds, bank loans and corporate bonds.

Further to our story in the November 2012 edition of the Australian Resources Sector Update, The Australian has reported that ASX-listed iron ore miner Mount Gibson is increasing its efforts to seek acquisitions. Chief Executive Officer, Jim Beyer, has reportedly indicated that Mount Gibson is considering a range of acquisitions, including coking coal, within Australia at either the development or operational stage.

It has been reported that Shenhua Overseas Development and Investment, a subsidiary of the Chinese state-owned Shenhua Group, is seeking to invest in overseas coal assets, including in Australia. It has been reported that Shenhua Overseas would prefer coking coal and thermal coal assets of over 5800kcal/kg. Any coal assets should have an estimated annual output of 3 - 5Mt, strong transportation infrastructure and have completed feasibility studies.

REGULATORY UPDATES

MINING AMENDMENT ACT 2012 (WA)

The Mining Amendment Act 2012 (WA) was assented to on 29 November 2012, providing for several amendments to the Mining Act 1978 (WA) (Act) (at the date of this publication, they have not commenced). Notable amendments include:

• refining compulsory partial surrender requirements affecting all exploration licences (including to increase the number of discrete areas which can remain following partial surrender, from three discrete areas to six, providing greater flexibility to holders rationalising ground retention);
• broadening the definition of "mining operations" to include all forms of mining, including the processing of underground coal (not presently covered by any State legislation);
• bringing Commonwealth land within the operation of the Act;
• allowing mining lease applicants who are listed on the ASX to lodge a resource report in lieu of a mineralisation statement (the resource report must set out the location of mineral resources, comply with the JORC Code, and have been made to the ASX); and
• increasing monetary penalties (including to introduce a higher corporate penalty).

MINING AND OTHER LEGISLATION AMENDMENT BILL 2012 (QLD)

The Mining and Other Legislation Amendment Bill 2012 (Qld) was introduced into the Legislative Assembly on 28 November 2012. The Bill will amend the existing competitive tendering regime under the Petroleum and Gas (Production and Safety) Act 2004 (Qld) and will also introduce a tendering process under the Mineral Resources Act 1989 (Qld) for exploration permits for coal and a cash bidding component for highly prospective areas.

Amongst other stakeholders, the Queensland Resource Council (QRC) has made a submission to the Parliamentary Committee, drawing Parliament's attention to a number of issues in relation to the Bill, including:

• QRC does not support the cash bidding process for exploration tenures, and believes that it may compromise the Queensland Government's ability to be seen to impartially regulate projects;
• the cash bidding process may negatively impact on small explorers; and
• the Bill states that only "highly prospective" areas will be selected for cash bidding, but there is no indication as to how the highly prospective areas will be identified or how the cash bidding process will operate.

A public hearing on the Bill is scheduled for 13 February 2013. If QRC is invited, it will also provide a verbal briefing to the Committee. Due to the public hearing, and the number of submissions that have been made on the Bill, it is possible that the Bill may be amended before it becomes law.

OTHER NEWS

POSSIBLE REVISIONS TO THE MINERAL RESOURCES RENT TAX

The Australian Financial Review has reported that the recent GST review also reviewed state resources royalties. Reportedly, a recommendation has been made to place a limit on the credits available to miners under the mineral resources rent tax, which would limit the refunds that major mining companies could claim for state royalties. Reportedly the review is currently being considered by the Federal Government and is yet to be released publicly. The Australian has reported, however, that the Federal Government's mining tax advisors have advised against any reform that would seek to "claw back" refunds already provided to companies.

ENERGY WHITE PAPER 2012

The Department of Resources, Energy and Tourism has released the Energy White Paper 2012 - Australia's Energy Transformation (October 2012) (Energy White Paper). The Energy White Paper outlines a strategic policy framework to address the challenges in Australia's energy sector. According to the Paper, there a number of key policy challenges in the energy and resources sector including:

• promoting competitiveness by streamlining and improving regulation;
• ensuring that developments are economically, socially and environmentally sustainable, and support the transformation to a clean energy economy; and
• ensuring that infrastructure maintains pace with energy and export needs and that there is a skilled and available workforce.

JORC CODE 2012 EDITION

The Joint Ore Reserves Committee (JORC) has made available the Australasian Code for Reporting of Exploration results, Mineral Resources and Ore Reserves (the JORC Code 2012).

Until 30 November 2013, the minimum requirement is compliance with the JORC Code 2004 edition and the current version of the ASX listing rules. Compliance with the additional disclosure requirements under the JORC 2012 Edition and revised ASX listing rules is encouraged until the JORC Code 2012 is fully implemented. Compliance with both the JORC Code 2012 and listing rules becomes mandatory on 1 December 2013.

NATIONAL MINERAL EXPLORATION STRATEGY

In December 2012, COAG's Standing Council on Energy and Resources (SCER) released the National Mineral Exploration Strategy (Strategy) and accompanying Mineral Exploration Investment Attraction Plan (MEIA Plan).

The Strategy, which was developed in response to the Levers to Improve Australia's Global Position for Attracting Resource Exploration Investment paper released by the SCER earlier in 2012, acknowledges that Australia needs to invest in pre-competitive geoscience research in order to maintain its standing as an attractive exploration destination.

The Strategy focuses on gathering regional seismic and airborne geophysical surveys, geological mapping and sampling, and companies' geosciences and exploration data, and on researching the potential for mining a range of new commodities. Through such data collection, which will be dependant on Federal, State and Territory government funding, the SCER aims to advocate exploration opportunities in greenfield areas and promote Australia as the preferred destination for mineral exploration.

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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