Australia: Australian Mining Sector Update: June 2013 Edition

Introduction

Welcome to the June 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

Further to our story in the May 2012 edition of the Australian Resources Sector Update, ASX-listed coal miner Aquila Resources announced on 29 April 2013 that its proposed joint venture with Sumisho Coal Australia Pty Limited, a wholly owned subsidiary of Japan's Sumitomo Corporation, is not proceeding. Sumitomo elected not to proceed with the acquisition of a 20% to 50% interest in Aquila's collection of wholly owned coal exploration permits in Queensland (excluding the Washpool Hard Coking Coal Project and Talwood Coking Coal Project) following two independent valuations of the assets, which provided an average value of A$108.8 million on a 100% basis.

ASX-listed iron ore developer Dragon Energy announced on 30 April 2013 that it has signed a farm-in and joint venture agreement with Chinese state-owned companies Shandong Energy Australia and Shandong Lunan Geo-Engineering Exploration Institute for its Ashburton Project located in the south of Western Australia's Pilbara region. Under the agreement, Shandong Energy and Shandong Lunan will jointly contribute A$2 million towards exploration over a 3 year term in order to each receive a 32.5% interest in the Ashburton Project. Drilling at the Ashburton Project is anticipated to commence in late 2013.

On 1 May 2013, ASX-listed iron ore miner Pluton Resources announced that it has reinstated the Asset Sale Agreement relating to the sale of a 50% interest in the Western Australian Cockatoo Island Iron Ore Project to Wise Energy Group, and the corresponding Joint Venture Agreement, after all outstanding conditions precedent were fulfilled. The reinstatement follows the recent appointment of new management within both companies, resulting in a cooperative and productive working relationship. Under the Joint Venture Agreement, Pluton will be the Manager responsible for the operation of the mine, whilst Wise Energy will assume shipping and marketing responsibilities for the Cockatoo Island iron ore. The Joint Venture Agreement will also lead to the resumption of trading in Pluton shares.

On 13 May 2013, ASX-listed rail network owner and operator Aurizon Holdings announced that it will implement new debt facilities for itself and its subsidiary Aurizon Network, anticipated to take effect by June 2013. A$3 billion worth of new committed debt facilities will be placed in Aurizon Network, with A$2.2 billion of that amount anticipated to be drawn initially. The remaining balance will be accessible to fund the Wiggins Island Rail Project and other committed expansion projects. Aurizon Holdings has stated that the new financial structure will provide flexibility to introduce a minority equity interest into Aurizon Network, including governance rights equal to the level of interest acquired, representation on the Aurizon Network Board and consent rights regarding particular significant corporate matters. The Australian has reported that a 20% to 30% interest in Aurizon Network is expected to be put up for sale and could reportedly fetch between A$1.4 and A$2.1 billion, whereas the Australian Financial Review has reported that up to a 49% interest may be put on the market. The Australian Financial Review has also reported that the minority Aurizon Network interest could appeal to Industry Funds Management, the Future Fund and the Canadian Pension Plan Investment Board, which have all reportedly been previously asked to submit offers for a 25% interest in Aurizon Network's track infrastructure.

On 24 April 2013, ASX-listed iron ore miner Western Desert Resources (WDR) announced that it has secured a A$30 million interim funding facility from Macquarie for the continued development of its Roper Bar Iron Ore Project in the Northern Territory. The Directors of WDR remain confident that the Roper Bar Project will be completed on time and on budget, with the first shipment of iron ore anticipated in October 2013 at a rate of 3 Mtpa. Recent JORC compliant Mineral Resource estimates for the project have increased by 50% to 611 Mt at 40.3% Fe. WDR has also stated that discussions regarding potential off-take partners are well advanced, with the Directors intending to finalise negotiations by July 2013.

Recently Completed Deals

Further to our story in the May 2013 edition of the Australian Mining Sector Update, shareholders of ASX-listed Endocoal were paid A$0.38 per share in accordance with the Scheme Implementation Agreement with China's U&D Mining on 7 May 2013. This is final step in the Scheme of Arrangement.

Market Rumours and Opportunities

The Switzerland-based metals trader Glencore completed its merger with UK-based mining group Xstrata on 2 May 2013 in a deal valued at US$30 billion. Xstrata's shares were delisted from the London Stock Exchange on 2 May 2013, with the cancellation of Xstrata's Swiss listing taking effect a few days later. Following the Glencore Xstrata merger, Newswire Round-up has reported that the newly merged Glencore Xstrata will seek more acquisitions, with analysts reportedly citing Anglo American as a potential takeover target. Glencore Xstrata's announcement on 13 May 2013 of its decision to cease work at its Balaclava Island port project near Gladstone has prompted media speculation that the merged entity will also divest its Wandoan coal mine.

Further to our stories in the April 2013 and May 2013 editions of the Australian Mining Sector Update, Mergermarket has reported that fist round bids for ASX-listed Rio Tinto's 59% interest in Iron Ore Co. of Canada (IOC) are due imminently. The sale process has reportedly faced some delays, with the sluggish finalisation of confidentiality agreements between some interested parties hindering the potential for consortiums to be formed, which may be required for such a sizeable deal. Despite previous reports that Teck Resources was unlikely to proceed with a bid for the IOC interest, Teck is now reportedly considered the frontrunner. However, Teck's CEO Don Lindsay has reportedly stated that speculation surrounding potential M&A is "grossly overblown".

Japan's Mitsubishi holds a 26% interest in IOC and reportedly does not want to operate the assets. As such, reports have surfaced that Mitsubishi may help fund an acquisition if another party is willing to operate the mine. The Australian Financial Review has reported that global mining investor and minority shareholder in Rio Tinto and BHP Billiton, BlackRock, has encouraged Rio Tinto and BHP Billiton to accept lower offers for assets, reasoning that assets do not have to be sold at full market value in order to secure better shareholder returns.

Newswire Round has reported that Indian infrastructure company Lanco Infratech's plans to introduce a minority strategic partner for its Australian subsidiary Griffin Coal have been delayed due to concerns over the increasing Australian dollar and decreasing global coal prices. Lanco reportedly intends to increase the production of its Western Australian coal mine from 4 Mtpa to 18 Mtpa, as well as expand a berth in the Bunbury port, which will reportedly require approximately US$1 billion. Lanco is believed to be in preliminary discussions with strategic investors, reportedly anticipating active talks to commence in early 2014. Lanco reportedly also intends to offer a third party the development rights for an 85 kilometre railway linking the mine to the port.

Further to our stories in the April 2013 and May 2013 editions of the Australian Mining Sector Update, India's The Economic Times has reported that Coal India has received 32 responses in relation to its proposed overseas coal mine acquisitions, spanning from offers of a minority shareholding to outright sales. Reportedly, Coal India intends to draft a shortlist and begin talks with interested parties within three months, with the view of closing a purchase with 12 months. Mining Weekly has reported that, although the Indian Parliament's Standing Committee on Coal and Steel has criticised Coal India for failing to use the dedicated funds reserved for overseas asset acquisition during the previous two financial years, this is unlikely to impact Coal India's plans for the current financial year.

Liquidators of Nathan Tinkler's Mulsanne Resources have been reported in MiningNewsPremium to have commenced legal proceedings against its directors for alleged insolvent trading following the failure of Mulsanne Resources to provide A$28.4 million of pledged funding in accordance with a share placement agreement with ASX-listed coal miner Blackwood Corporation. Reportedly, the liquidators have concluded that there is a case of insolvent trading and breach of directors' duties to answer, following the public examinations and reviews which were conducted. If found accountable for insolvent trading, the directors and officers of Mulsanne Resources may have compensation orders made against them personally.

ASX-listed Whitehaven Coal has reportedly settled its dispute with former Aston Resources chief executive Hamish Collins out of court for an undisclosed sum. In a A$157 million claim against Aston Resources (which has since merged with Whitehaven Coal), Collins reportedly alleged he was entitled to equity participation in Aston Resources in accordance with the terms of his employment. Whitehaven Coal's managing director Paul Flynn has reportedly stated that he is "very pleased to have the matter resolved", with terms of the settlement reportedly involving Collins' withdrawal of all claims against the Whitehaven Group.

Other News

The Federal Budget and the resources sector

In the Federal Budget handed down on 14 May 2013, several important issues were raised for the resources sector. Importantly, the fuel tax credit has been maintained, which will save the industry around A$2 billion. If abolished, companies would have faced a potential 32c per litre increase in fuel costs for operations. Secondly, changes have been made to the tax deductibility of exploration costs, which may cost the minerals and energy industry an estimated A$1.1 billion over four years. Finally, federal investment in carbon capture and storage project funding has been cut by A$500 million with A$1 billion in funding still being allocated towards such projects. To view the Corrs' full Federal Budget wrap up, follow this link: http://www.corrs.com.au/thinking/insights/federal-budget-2013-14-a-tough-one-for-business-especially-multinational-business/

A$33.3 million committed towards miner accommodation in the Pilbara

The Western Australian government and BHP Billiton have agreed to contribute a total of A$33.3 million towards the establishment of trainee and apprentice hostels in two locations in the Pilbara region. The project is expected to be completed by 2014, with close to half of its funding coming from the government's "Royalties for Regions" program. The project represents a partnership between BHP Billiton, the Western Australian government-run Pilbara Development Commission, the Western Australian government Department of Housing and the federal government Department of Families, Housing, Community Services and Indigenous Affairs.

India's imported coal dependency to continue to at least 2017

The Indian government has confirmed that India's reliance on imported coal will continue to 2017 at least, with the Junior Minister for Coal reportedly stating there is no anticipated reduction in the gap between demand and supply before that time. The Planning Commission has estimated India's coal imports to reach 187 Mt by 2017, representing almost 20% of the worldwide trade in coal. However, the Indian Coal Ministry has noted these forecasts may be modest, with at least 30,000 MW of planned power projects yet to confirm coal supply agreements.

Indian government retains iron ore import duty

The Indian government has rejected a proposal that custom duty levies imposed on imported iron ore should be scrapped due to shortages of iron ore from domestic producers. In a statement by the Finance Ministry, the government announced that it did not find it feasible to abandon the current 2.5% import duty due to comparable levies on other ores and concentrates. Reportedly, India's Mines Minister has confirmed there will be no shortages of iron ore, while India's Steel Minister has stated that domestic iron ore production was exceeding demand, with no overall scarcity of the raw material. In contrast, the industry lobbying group, Associated Chambers of Commerce and Industry, has emphasised that an exemption from the import duty is essential due to the deteriorating domestic steel industry. Several Indian steel producers including JSW Steel and Essar Steel have recently confirmed that they have had to use imported iron ore in order to operate their plants.

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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