Mining Sector Update - November 2013

INTRODUCTION

Welcome to the November 2013 edition of the Australian Mining Sector Update, a monthly 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 on recently completed deals, market rumours, potential opportunities and relevant regulatory updates.

RECENT ANNOUNCEMENTS

Further to our story in the October 2013 edition of the Australian Mining Sector Update, on 29 October 2013, ASX-listed minerals exploration, development and mining company Inova Resources announced that it has received notice from Shanxi Donghui Coal Coking & Chemicals Group that all Chinese regulatory approvals have been received in relation to Shanxi Donghui's takeover offer for all of the issued shares of Inova at a price of A$0.22 per share. Further, Shanxi Donghui has advised that it has waived all remaining conditions of its takeover offer, except the minimum 51% acceptance condition. Inova has also announced that it has not yet been informed whether its majority shareholder Turquoise Hill has accepted Shanxi Donghui's takeover offer, but that Inova will promptly inform shareholders as the takeover offer progresses. Shanxi Donghui's takeover offer is open until 14 November 2013, unless further extended by Shanxi Donghui. Inova has appointed Corrs to advise on the takeover offer.

ASX-listed Linc Energy announced on 3 October 2013 that its wholly owned subsidiary New Emerald Coal has entered into a sale and purchase agreement with the Blair Athol Coal Joint Venture (BACJV) to acquire the Blair Athol coal mine located in Queensland's Bowen Basin. Under the sale and purchase agreement, New Emerald Coal will pay no upfront amount and the BACJV will contribute to the anticipated statutory site rehabilitation requirements. Completion of the acquisition is conditional on commercial arrangements relating to New Emerald Coal's access to train-loading capacity, workforce accommodation and port and rail capacity to Abbot Point being finalised, which New Emerald Coal expects to take six months. The Blair Athol mine ceased operations in November 2012, but will be reopened following completion of the acquisition, with a production target of 3 Mtpa. Corrs advised Linc Energy in relation to this acquisition.

On 17 October 2013, ASX-listed Cockatoo Coal announced an equity raising of A$153 million consisting of three inter-conditional placements of new shares – a A$50 million placement to SK Networks Co, a A$43 million placement to Noble Group and a A$60 million placement to institutional and sophisticated investors (cornerstoned by Harum Energy Australia who has provided a A$20 million commitment). Existing Cockatoo Coal shareholders have also been invited to participate in a share purchase plan at an offer price of A$0.045 per share by subscribing for up to A$15,000 worth of new shares. Proceeds from the equity raising will be used to repay a A$95 million KEB Australia loan facility, while ANZ has fully underwritten a A$255 million senior secured project finance facility which will be used to fund the Baralaba Expansion project located in Queensland's Bowen Basin. Cockatoo Coal also announced that it has entered into a bid implementation agreement with Blackwood Corporation for Cockatoo Coal to acquire all of the issued share capital in Blackwood in an off-market takeover bid. Blackwood shareholders will be offered two new fully paid Cockatoo Coal shares for each Blackwood share held. The takeover offer is subject to a 52.1% minimum acceptance condition and the successful completion of the equity raising. Blackwood's directors have unanimously recommended that shareholders accept Cockatoo Coal's offer.

ASX-listed Rio Tinto announced on 25 October 2013 that it has reached a binding agreement to sell its 50.1% interest in the Clermont Joint Venture to GS Coal, a company jointly owned by Glencore-Xstrata and Japan's Sumitomo Corporation. Under the terms of the sale, management of the Clermont thermal coal mine will be assumed by Glencore-Xstrata. Mitsubishi Development, J-Power Australia and JCD Australia are the other partners to the Clermont Joint Venture and the sale of Rio Tinto's interest is conditional upon their agreement to particular terms, including those covering pre-emptive rights. Rio Tinto's interest will be sold for US$1.015 billion, with the sale expected to be completed by March 2014.

On 25 September 2013, ASX-listed MetroCoal announced that it has signed a merger implementation agreement with ASX-listed Cape Alumina under which the companies will merge to form a diversified bauxite and thermal coal business. The merger will be implemented through a scheme of arrangement where Cape Alumina shareholders will be offered approximately 1.12 MetroCoal shares for every Cape Alumina share held. This will result in Cape Alumni shareholders holding 55% of the merged company and MetroCoal shareholders holding 45%. The scheme of arrangement is conditional on Resource Capital Funds IV L.P (a major Cape Alumina shareholder) converting its A$5 million Cape Alumina convertible note into Cape Alumina shares at a price of A$0.12 per share. MetroCoal has also agreed to provide a A$3 million convertible note to Cape Alumina to assist with the progression of the Pisolite Hills bauxite project located in Cape York. The merged company will have an estimated market capital in excess of A$28 million and combined JORC compliant resources of 202.4 Mt of high-quality Cape York, export-grade bauxite and 4.2 Bt of thermal coal in Queensland's Surat Basin. The merger is expected to be finalised before the end of 2013.

ASX-listed Gujarat NRE Coking Coal announced on 16 October 2013 that a resolution authorising Jindal Steel & Power to acquire a majority stake in Gujarat has been unanimously passed by its shareholders. Jindal will subscribe to 328.5 million new shares in Gujarat and a further 328.5 million unlisted transferable options, exercisable within five years from their date of issue for no consideration. Jindal now has a 44.68% shareholding in Gujarat, which will increase to 53.62% following the exercise of the options.

Further to our story in the August 2013 edition of the Australian Mining Sector Update, on 14 October 2013, ASX-listed coal miner Rey Resources announced that the agreement with Hong Kong-based private investment company Crystal Yield Investments to acquire Rey Resource's Duchess Paradise coal project will not proceed and will be formally terminated. However, Crystal has agreed to subscribe for a further A$1.36 million placement in Rey Resources at a price of A$0.08 per share. This subscription means Crystal will hold 19.9% of the issued capital in Rey Resources, making Crystal a cornerstone investor.

MARKET RUMOURS AND OPPORTUNITIES

According to the Wall Street Journal, public unlisted iron ore exploration and development company Aard Metals is considering selling its flagship Warrego project located in the Northern Territory. The Warrego project is said to hold 7.8 Mt of iron ore, 2.9 Mt of magnetite, as well as small quantities of gold and copper, and is approaching production stage. Any sale could reportedly terminate off-take agreements with Weistel International, an investment entity of China's Weifang Iron and Steel. Aura Capital advised Aard Metals when it considered a market listing in 2012 and has reportedly been engaged to advise on the potential Warrego project sale. Reportedly, the Warrego project could fetch approximately A$20 million.

According to the Press Trust of India, Indian state-run mining and power generating company Neyveli Lignite has shortlisted nearly 20 proposals to buy overseas coal assets from countries including Australia. Reportedly, the proposals were submitted under five different categories, including potential joint ventures, and the majority of the 89 proposals received came from Indonesia. Neyveli Lignite is reportedly expected to acquire up to three assets from the shortlist before December 2013 following the completion of its due diligence process.

Despite continued speculation that ASX-listed Whitehaven Coal may raise capital in the face of its decreasing share price, the Australian Financial Review has reported that Whitehaven's management is against raising capital. Reportedly, Whitehaven is anticipating an upturn in coal prices. Whitehaven Coal's largest shareholder Farallon Capital Management has thrown its support behind the A$767 million Maules Creek project, as well as behind Whitehaven Coal's board and management. Farallon became Whitehaven Coal's largest shareholder after buying Nathan Tinkler's stake in June 2013. Raymond Zage, Managing Director of Farallon's subsidiary Noonday Asset Management, has reportedly stated that "the Maules Creek opportunity for its metallurgical and thermal coal prospects, we still think is a very interesting story and are a believer in the project."

Further to our stories in the April, May, July and August 2013 editions of the Australian Mining Sector Update, the Montreal Gazette has reported that Teck Resources is becoming increasingly less likely to continue in the sale process for the acquisition of ASX-listed Rio Tinto's majority interest in Iron Ore Co. of Canada (IOC). Reportedly, the parties are unable to agree on an acceptable price, with Teck's valuation being considerably lower than Rio Tinto's. Newswire Round-up has similarly reported that China Minmetals is also likely to withdraw from the sale process due to Rio Tinto's unrealistic price expectations for its interest in IOC.

REGULATORY UPDATES

Legislation To Repeal the Carbon Tax Released

On 15 October 2013, the Federal Government released carbon tax repeal bills for public consideration. The raft of eight bills propose to:

• abolish the carbon tax from 1 July 2014;
• abolish the Climate Change Authority; and
• expand the Australian Competition and Consumer Commission's (ACCC) powers to take action against businesses that engage in price exploitation following the carbon tax repeal.

Corrs has prepared a Thinking Piece discussing what the draft carbon tax repeal legislation means for businesses, which can be viewed here.

Minerals Resources Rent Tax Repeal and Other Measures Bill 2013 (CTH)

On 24 October 2013, draft legislation was released for the repeal of the Mineral Resources Rent Tax (MRRT). The Minerals Resources Rent Tax Repeal and Other Measures Bill 2013 (Cth) proposes to abolish the MRRT from 1 July 2014 by repealing the following Acts, in addition to making a number of consequential amendments:

• Minerals Resource Rent Tax Act 2012 (Cth);
• Minerals Resource Rent Tax (Imposition—Customs) Act 2012 (Cth);
• Minerals Resource Rent Tax (Imposition—Excise) Act 2012 (Cth); and
• Minerals Resource Rent Tax (Imposition—General) Act 2012 (Cth).

The Federal Government has announced that the repeal of the MRRT package will contribute more than A$13 billion worth of savings towards the Budget's bottom line on an underlying cash basis over the forward estimates.

OTHER NEWS

New Coal Land Released in Queensland's Bowen Basin

The Queensland Government has called for tenders to explore for coal in seven areas located in the northern Bowen Basin which collectively cover nearly 1,300 square kilometres. This is the first land release for coal competitive tendering since the policy and legislative changes allowed for exploration permits to be granted through a tender process instead of their previous 'over-the-counter' application process. The Minister for Natural Resources and Mines Andrew Cripps has noted that applications for this land will be assessed on the competitiveness of the work programs submitted, as well as the associated technical and financial capabilities of the explorer, but that there will be no requirement for a cash bid to be made. Interested parties have until 2.30pm on Wednesday 5 March 2014 to lodge their application. Further information is available here.

Corrs Industry Publication – Australian Coal Companies – From Micro to Mid Cap

Australian Coal Companies – From micro to mid cap is a Corrs publication that analyses over 25 small- to medium-sized Australian companies that focus on coal exploration, development and production. By consolidating information from various sources, the publication provides a snapshot of the key projects pursued by each company and gives the reader an understanding of how these projects will be funded and operated, when they are likely to produce first coal, and whether they have access to critical infrastructure. The publication also identifies recent corporate and investment activities, and highlights potential opportunities which may arise for investors.

Corrs also produces similar publications for other resource industries, including:

• Australian Iron Ore Companies – From micro to mid cap;
• Australian Copper and Gold Companies – From micro to mid cap; and
• Oil and Gas Companies – From early stage exploration to full-scale production.

For a copy of any of these publications, please email kirby.amos@corrs.com.au.

Milestone Reached in Rio Tinto's Pilbara Expansion

ASX-listed Rio Tinto has reached a significant milestone in its expansion plan to integrate its operations in the Pilbara region, with Western Australia Premier Colin Barnett officially opening Rio Tinto's Cape Lambert wharf B on 2 October 2013.

Not only does this expansion increase Rio Tinto's overall capacity in the Pilbara region to 290 Mtpa, it is anticipated to expand Cape Lambert's port capacity by 130 Mtpa to 210 Mtpa. Of the 512.6 Mt of iron ore produced in Western Australia in 2012-13, Rio Tinto's production represented approximately half. Rio Tinto has further expansion plans, hoping to increase its overall integrated capacity in the region to 360 Mtpa, and so far, has already committed US$5.9 billion towards Pilbara infrastructure.

Landholders and Miners in Queensland Benefit From New Approvals Process

Queensland's Minister for Natural Resources and Mines Andrew Cripps has announced a streamlining overhaul to the assessment process for mineral and coal exploration permits which is intended to halve the time in which these permits are granted. It is estimated that exploration permits currently take an average of 22 months to be granted or rejected. Under the new process, the Department of Natural Resources and Mines has set customer service standards to decide:

• all work programs in 90 days;
• exploration permit applications subject to native title in 12 months; and
• exploration permit applications not subject to native title in six months.

Minister Cripps noted that these changes will give more certainty to landholders and resources companies by allowing for earlier engagement, as resources companies will no longer need to wait until an exploration permit is granted before engaging with landholders about their proposed exploration activities. Further information on the new approvals process is available here.

Mining in Indonesia – Surveying The Minefield

On the surface, Indonesia seems an ideal destination for mining, combining an abundance of resources with the largest economy in South East Asia. Yet a global survey in 2012/13 found that out of 96 countries, Indonesia was the least attractive investment destination for the mining industry. Digging deeper, a review of Indonesia's legal framework for mining reveals reasons why. Corrs' secondee at leading Indonesian law firm Soemadipradja & Taher has prepared a Thinking Piece discussing mining in Indonesia, which can be viewed here.

Queensland Regional Plans and Strategic Cropping Land Review Released

The new Regional Plans for Central Queensland and Darling Downs have been released by the Queensland Government, in addition to the Review of the Strategic Cropping Land (SCL) Framework. The Regional Plans will identify and map Priority Agricultural Areas (PAA) which will be protected from incompatible resources activities. A resource development that intends to operate within a PAA will need to meet 'co-existence criteria' established to ensure no material loss of land, no threat to continued agricultural use and no material impact on irrigation aquifers or overland flow occurs. The Queensland Government is set to introduce a Regional Planning and Development Act into Parliament later this year which will provide for a single, integrated framework that addresses SCL and the implementation of the new Regional Plans. Further information is available at:

• http://www.dsdip.qld.gov.au/regional-planning/the-central-queensland-regional-plan.html – for the Central Queensland Regional Plan (which includes Banana Shire Council, Central Highlands Regional Council, Gladstone Regional Council, Rockhampton Regional Council, Woorabinda Shire Council and (from 1 January 2012) Livingstone Council);
• http://www.dsdip.qld.gov.au/regional-planning/the-darling-downs-regional-plan.html – for the Darling Downs Regional Plan (which includes Balonne Shire Council, Goondiwindi Regional Council, Maranoa Regional Council, Southern Downs Regional Council, Toowoomba Regional Council and Western Downs Regional Council); and
• http://www.nrm.qld.gov.au/land/planning/strategic-cropping/ – for the Strategic Cropping Land Framework Report.

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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