Insights and trends for the leading edge of the mining, gas and energy industries
Welcome to the Special AMPLA edition of the Australian Energy and Resources Sector Update, a publication prepared by Corrs Chambers Westgarth for clients who are interested in the Australian energy and resources industries.
This publication brings together a brief summary of information on recently completed deals, market rumours, potential opportunities and relevant regulatory updates.
On 25 September 2014, SGX- listed Sino Construction Limited announced its intention to make an off-market takeover bid to acquire a 100% stake in ASX-listed Guildford Coal. Guildford is a resources company with coal mining projects in Australia and Mongolia that are in various stages of development. The JORC-compliant Indicated and Inferred Resources of Guildford's Australian projects consist of 2.13 billion tonnes of coking, high-grade thermal, and pulverised coal injection target of up to 7.17 billion tonnes of coal from its 18,000 km2 of tenements. The Mongolian projects, which have a total JORC Resource of 290 million tonnes, are valued by Guildford at A$300-400 million on a pre-tax NPV basis. In August 2014, the Baruun Nayon mine in South Gobi, Mongolia commenced production with a first shipment of 8,000 tonnes of coking coal.
According to Sino's announcement, its takeover offer for Guildford will be made at a bid volume of A$0.0613 per Guildford share. The consideration will be satisfied via the issue of one new ordinary share in Sino for every 4.5 Guildford shares held. Based on the issued and paid-up share capital of Guildford as at the date of Sino's announcement, up to 229,639,650 new shares may be issued as the consideration for the takeover bid. The proposed bid is subject to regulatory and other customary conditions, including shareholder approval. The announcement said that a formal takeover offer will be made within two months by the lodgement of a bidder's statement in compliance with Australian laws.
Further to our reporting in the August edition of the Australian Mining Sector Update, on 8 October 2014, BC Iron has announced that it holds a relevant interest in 90.37% of Iron Ore Holdings (IOH) shares, meaning BC Iron is now entitled to proceed with compulsory acquisition of IOH. BC Iron is offering IOH shareholders 0.44 new BC Iron shares and A$0.10 in cash for each IOH share they hold. This offer will close at 5pm on 14 October 2014 and BC Iron says it will proceed with compulsory acquisition shortly.
On 22 September 2014, the Board of Bandanna Energy, the ASX- listed proponent of the underground Springsure Creek thermal coal mine in Central Queensland, resolved to place the company into voluntary administration, appointing PPB Advisory as administrators.
The ASX-listed iron ore miner, Western Desert Resources, has announced that negotiations with Macquarie Bank for ongoing financial support (particularly in relation to restructuring the company's project finance facility term, debt repayment profile and short term working capital funding requirements) have been unsuccessful. On 5 September 2014, the Board resolved to appoint KordaMentha as Voluntary Administrator. Ferrier Hodgson was appointed as Receiver and Manager pursuant to various securities held by Macquarie on the same day.
On 18 August 2014, Idemitsu Kosan announced that it would transfer a 10% interest in the open cut Boggabri Coal Mine to a wholly- owned Australian subsidiary of the Japanese power company Chugoku Electric Power Co. for an undisclosed amount. The transaction includes a long term coal sale agreement with Chugoku and is subject to a number of conditions precedent, including approval of relevant authorities. Located in New South Wales, Boggabri produces high quality thermal coal with high calorific value, low sulphur and low ash content. According to Idemitsu's announcement, production from the mine for the 2014 calendar year is scheduled to be about 5.4 million tonnes. Idemitsu says this deal will strengthen its existing relationship with Chugoku, support Chugoku's long term procurement of thermal coal for its power plants and contribute to its steady supply of electricity.
Further to the September 2014 edition of the Australian Energy Sector Update, the acquisition of ASX listed Dart Energy by IGas Energy under a scheme of arrangement between Dart and its shareholders was approved by the Supreme Court of Queensland on 30 September 2014 and announced by Dart on the same day. Dart announced on 1 October 2014 that it had lodged a copy of the Court's orders approving the scheme with ASIC, which makes the scheme legally effective.
On 22 September 2014, ASX-listed Buru Energy announced that it has completed a A$28 million placement of 12.5% of Buru Energy's equity capital. The funds will be used to progress the company's 2015 work program, which includes the drilling of at least four oil and gas exploration wells and the frac and flow test of up to four wells to determine the flow characteristics of the Laurel Formation basin centred tight wet gas project. According to the announcement, A$20 million was subscribed by a new substantial investor, the Perth-based private company, Coogee Chemicals, which is investigating the development of a gas-to-methanol plant in north west Western Australia. Buru intends to work with Coogee Chemicals to determine whether the proposed plant could be supplied with gas to be produced from Buru's Laurel Formation basin centred tight wet gas project. Buru also announced its intention to continue to progress discussions in relation to the potential farmout and future funding of the Laurel wet gas commercialisation project.
Market rumours and opportunities
According to an article in the Business Spectator on 2 October 2014, the NSW Government is expecting to close the sale of the Cobbora coal project before the end of 2014. After calling for expressions of interest in August this year, the Government is believed to have opened the data room to a number of interested parties.
The Cobbora project was an initiative of the previous Labor Government to provide subsidised coal to State- owned power generators, however the supply contracts were reportedly terminated when other generators, including Macquarie Generation, were sold. It is estimated that Cobbora contains at least 140 million tonnes of thermal coal and, according to the Government, mine development and local infrastructure plans are all in place to proceed with the project. The Government reportedly said that at least A$1.5 billion will be needed to develop and operate the mine. According to the article, the project could attract bargain hunters, with the market presenting an opportunity for buyers looking to pick up undervalued assets as part of their longer-term plans.
Reporting on a similar theme, an article in The Australian on 23 September 2014 cited New Hope Corporation CEO, Shane Stephan, as saying that the company's strong balance sheet enables it not only to survive the downturn, but also to take advantage of current market conditions to explore asset acquisition opportunities at a time when valuations are becoming more compelling. New Hope reportedly anticipates that challenging market conditions will continue in 2015 but plans to focus on cost efficiencies to ensure its coal operations remain profitable. Stephan reportedly said that the company's focus remained on "the tight control of costs, while also steadily advancing project approvals, to position the group for growth when market conditions improve".
An item in the Australian Financial Review on 23 September 2014 also reported on New Hope's M&A growth strategy, citing Stephan as saying that the company will look at assets in North America and Australia, while also assessing prospects in the coking coal market, but that it would not target acquisitions in Africa, Indonesia or Mongolia.
On 29 September 2014, the Business Standard reported that Neyveli Lignite Corporation, the State-run Indian mining and power generation company, announced plans to buy coal blocks abroad. Neyveli's chairman, B Surender Mohan, was reported as saying that the company is looking to acquire mines with an estimated capacity of between 200 and 250 million tonnes which can deliver coal supply for long periods, for a minimum 20 years. According to the article, Neyveli is expected to conclude a deal (being a joint venture agreement or the acquisition of an overseas mine) within the next six months.
According to an unsourced article in The West Australian on 8 September 2014, US-based Cliffs Natural Resources has appointed Jefferies Group to sell its iron ore assets in Western Australia, including the Koolyanobbing project. According to the article, Jefferies is believed to have received interest from Chinese steelmakers, Baosteel and Wuhan Iron and Steel, while Cape Lambert Resources is reportedly thought to have approached Cliffs with potential interest in the assets. The paper noted that Mineral Resources, the ASX-listed entity which holds iron ore assets near Koolyanobbing, or South Korean steel business POSCO, may also be interested.
On 1 September 2014, an unsourced article in the Australian Financial Review speculated that ASX-listed iron ore miner, Atlas Iron, may be of interest to Mount Gibson, another ASX-listed miner which reportedly has a significant cash balance but is currently facing a short mine life. According to the article, Atlas Iron has been the subject of increasing M&A speculation, with a falling share price opening the company up to potential takeover bids. The article noted that a Chinese player keen for offtake could also be a potential buyer, while an earlier piece in the same paper on 14 August 2014 reported Foster analysts saying that potential buyers may include Fortescue Metals, Hancock, X2 Resources, Anglo American, Glencore and Chinese steel makers.
On 2 October 2014, Mergermarket reported that Advent Energy, the Australian private oil and gas exploration and production company, is seeking joint venture partners to invest more than US$100 million to help develop a gas storage facility and bore more drill holes in the onshore Bonaparte Basin in Northern Australia. The company is the sole owner of EP 386 and RL 1 which cover more than 2,700 km2 in the Bonaparte Basin. Advent Energy has indicated that incoming investors would also need to fund a 3D seismic program and any joint venture deal is hoped to be concluded by the end of 2015 as Advent is seeking to start oil and gas production in 12-18 months.
An article in The West Australian on 26 September 2014 reported that, in response to a review of Western Australia's electricity system, Origin Energy and AGL Energy have made submissions that privatisation of the Western Australian State-owned power utility, Synergy (which directly or indirectly controls 75% of all the energy traded in the south west grid) could not happen until Synergy was structurally separated into generators and retailers. According to the article, both Origin Energy and AGL Energy also submitted that if Synergy is privatised, retailers should be allowed to sell gas as well as electricity because under the current arrangements Synergy is restricted from selling gas.
Further to the September 2014 edition of the Australian Energy Sector Update, an article in the Australian Financial Review on 24 September 2014, which did not cite sources, reported that Spark Infrastructure, the Australian infrastructure business, is seeking at least two partners to bid for part of the New South Wales A$20 billion electricity distribution network known as the "poles and wires" business. According to the article, the NSW Government has not yet outlined how the network assets Ausgrid, TransGrid and Endeavour Energy will be sold. A sales strategy is expected to be presented to the Government by the end of 2014 by the Government's advisers, Deutsche Bank and UBS.
MINERAL AND ENERGY RESOURCES (COMMON PROVISIONS) ACT 2014 (QLD)
Further to our reporting in June, the Mineral and Energy Resources (Common Provisions) Act 2014 (Qld) (MERA) was passed by the Queensland Parliament on 9 September 2014 and received royal assent on 26 September 2014. The Act is the first stage in the program to modernise and harmonise Queensland's resources legislation. Amongst other things, the MERA implements a consistent restricted land framework across all resource sectors and provides a new overlapping tenure regime for Queensland's coal and CSG industries.
The MERA was passed following a number of last minute amendments, including restrictions on who may object to a mining lease in the Land Court and on what grounds. This is designed to reduce duplication, as any person may still make submissions about the environmental authority application for a mining lease under the Environmental Protection Act 1994 (Qld). The amendments also empower the Land Court to strike out a mining lease objection where it is vexatious, frivolous, an abuse of the Court process, or outside the Court's jurisdiction.
The Queensland Resources Council (QRC) welcomed the passage of the MERA in a statement on 10 September 2014, saying it "delivers a recipe for regional economic growth." QRC CEO, Michael Roche, said the MERA "streamlines the objections process for the grant of a mining tenure but does not limit or remove a right to object to the mining project, rather, objections are considered as part of the project's environmental authority." He said that "communities and landholders remain important stakeholders and still retain a genuine opportunity to raise concerns over a mining project's environmental impacts" and that "the amendments reduce unnecessary duplication in Queensland's approvals processes."
The MERA will commence on a date to be set by proclamation, once the supporting Regulations have been finalised. A copy of the Act can be found here.
WATER REFORM AND OTHER LEGISLATION AMENDMENT BILL 2014 (QLD)
The Water Reform and Other Legislation Amendment Bill 2014 (Qld) was introduced into the Queensland Parliament on 11 September 2014. According to the Explanatory Notes, the Bill is designed, amongst other things, to provide a new framework for management and allocation of water in Queensland, and to establish consistency across the resources sector with respect to underground water rights and impact management. To do this, the Bill proposes to extend the underground water impact management framework relating to taking, interfering with and using underground water that currently applies to the petroleum and gas industry to the mineral resources sector.
The changes will provide the holder of a mining lease or mineral development licence with a statutory right to take "associated water" (underground water necessarily removed from a mine site in order to carry out operations) subject to compliance with certain requirements including reporting, monitoring and make-good obligations. This means the holder will no longer need to obtain a water licence to take or interfere with associated water.
A copy of the Bill can be found here.
NATIONAL ENERGY RETAIL LAW (QUEENSLAND) ACT 2014 (QLD)
The National Energy Retail Law (Queensland) Act 2014 (Qld) received royal assent on 26 September 2014. The Act applies the National Energy Retail Law set out in the schedule to the South Australian Act as a law of Queensland (subject to a number of modifications). Compared to existing arrangements under the Electricity Act 1994 (Qld) and the Gas Supply Act 2003 (Qld), the National Energy Retail Law, amongst other things, implements a clearer and more effective price comparison service to help customers choose the most appropriate customer retail contract, places regulatory obligations on retailers to operate programs to help small customers experiencing financial difficulty due to hardship, and applies a National Connections Framework that sets out clear processes for new connections, including response times to customer requests.
The Act modifies the application of the National Energy Retail Law in Queensland to ensure that regional electricity customers have continued access to energy, despite weak market competition, and provides additional customer protection and support to small customers following the removal of regulated prices in South East Queensland.
The Act will commence on a day or days to be fixed by proclamation. A copy of the Act can be found here.
ELECTRICITY COMPETITION AND PROTECTION LEGISLATION AMENDMENT ACT 2014 (QLD)
The Electricity Competition and Protection Legislation Amendment Act 2014 (Qld) also received royal assent on 26 September 2014. The Act amends the Electricity Act 1994 (Qld) to remove retail price regulation in south east Queensland (subject to a limited reserve power to allow the Minister to reintroduce price controls should competition become ineffective) and establishes a market monitoring regime via the Queensland Competition Authority. Further, the Act amends existing Queensland energy legislation to avoid duplication upon commencement of the National Energy Retail Law (Queensland) Act 2014 (Qld) (see above) and ensure that remaining provisions operate effectively. The Act commences on a date to be fixed by proclamation. A copy of the Act can be found here.
REPEAL ENERGY EFFICIENCY OPPORTUNITIES PROGRAM
The federal government has repealed the Energy Efficiency Opportunities (EEO) program introduced in 2006 by the previous Coalition Government effective from 29 June 2014. The EEO program had been implemented for the purpose of encouraging the implementation of cost-effective energy efficiencies by imposing obligations on large energy using businesses to assess the potential to improve their energy efficiency and report publicly on the outcomes. This deregulation will reduce compliance costs for businesses.
BREE OPTIMISTIC FOR FUTURE COAL OUTLOOK
The latest Resources and Energy Quarterly published by the Bureau of Resources and Energy Economics (BREE) for Q3 2014 paints a cautiously optimistic picture for the future of the Australian resources sector. According to the Report, "for several commodities, including iron ore and coal, prices are projected to rebound after 2016 as consumption growth starts to catch up with the recent jumps in production capacity and the recent investment in the sector will contribute to a rapid increase in Australia's export volumes."
BREE explains that the 40% drop in the price of iron ore this year was no greater than similar falls in each of the past two years, both of which were followed by big corrections, and believes the iron ore price will lift to average US$93.60 this year (although this still represents a sharp drop from the prediction of US$105.20 when BREE last updated its forecasts in June 2014).
Thermal coal prices are forecast to rally strongly, rising from US$77 a tonne in 2015 to US$95 by 2019, while metallurgical coal prices are expected to rise from a low of US$122.70 to reach US$143.50 a tonne in the same period. BREE anticipates that coal exports will add A$53 billion to national income in 2018-19, up from A$40 billion in 2013-14, with both thermal and metallurgical coal export volumes expected to rise (from 195 million tonnes of thermal coal in 2013-14 to 239 million tonnes in 2018-19, and from 181 million to 195 million tonnes of metallurgical coal in the same period).
According to a statement released by the Minerals Council of Australia (MCA) on 24 September 2014, the BREE Report confirms that "coal is here to stay" as the "continued industrialisation and urbanisation of Asia underpins the positive outlook for Australian coal". Summarising a special article in the BREE Report on global electricity trends, the MCA statement notes that coal will remain a primary source of electricity generation worldwide, including in India and China (whose suite of policies to reduce air pollution represents an opportunity rather than a threat to Australian exports of high-quality coal). Citing the BREE Report, the statement says that fossil fuels will be the "engines of growth" in developing Asia and that coal will play an increasing role in the electricity mix of newly developing Asian economies, including Bangladesh, Pakistan and Vietnam.
The BREE Report confirms statements made by Glencore's Mick Buffier in his address to the Sydney Mining Club on 4 September 2014. Mr Buffier said that demand for Australia's high quality coal will remain strong for decades to come as global energy needs continue to rise. Mr Buffier said that although the Australian mining sector is facing significant economic challenges with around one third of Australian coal mines currently operating at a loss (largely due to rising costs and a high Australian dollar against the greenback), the world's growing population and rapid urbanisation in Asia would continue to drive growth from all sources, including coal, for many years.
BREE predicts that Australian gas production is expected to grow at an average rate of 16% a year over the outlook period (until 2019) as seven new LNG projects commence production. As a result, export volumes are predicted to increase rapidly over the next five years, more than tripling by the end of the outlook period. According to the Report, by 2018, Australia's installed liquefaction capacity will be the highest in the world at 86.1 million tonnes a year. BREE notes that exports over the period will be underpinned by more than 65 million tonnes a year worth of contracts in 2018-19. Total exports are expected to reach 78.4 million tonnes in 2018- 19, making Australia the largest LNG exporter in the world.
In line with growing volumes, export value is expected to continue to increase from A$18.4 billion in 2014-15 to A$52.2 billion in 2018- 19 (in real 2014-15 dollars). This growth will, however, be almost entirely volume driven, as spot and oil prices are predicted to ease and the Australian dollar is expected to depreciate only slightly over the remainder of the outlook period.
LONG TERM INFRASTRUCTURE ASSET LEASES TO REDUCE DEBT IN QUEENSLAND
Following a Cabinet meeting on 7 October 2014, Premier Campbell Newman has confirmed that the Government has decided to lease rather than sell certain assets. According to a joint media release from the Premier and Treasurer on 7 October 2014, the Government proposes to offer the Ports of Gladstone and Townsville (with the Mt Isa Rail line), SunWater's commercial water pipelines, electricity generators Stanwell Corporation and CS Energy, electricity transmission and distribution companies Energex, Ergon and Powerlink and a range of non-core business activities currently run by these corporations for lease. These leases may last for up to 50 years with an option to extend for a further 49 years and are expected to yield $37 billion. However, Queensland Treasurer, Tim Nicholls, noted that the Government's plan to lease assets, and the allocation of funds generated by these leases, will not be actioned until the Government has received a mandate at the next State election.
DRAFT EMISSIONS REDUCTION FUND METHODS RELEASED FOR PUBLIC CONSULTATION
On 5 September 2014, the Federal Minister for the Environment, Greg Hunt, announced that the first draft emissions reduction methods for projects under the Emissions Reduction Fund have been released for public consultation. Emissions reduction methods set out the rules for estimating emissions reductions from proposed activities. The three draft methods released cover projects for landfill gas recovery, alternative waste treatment, and cleaning up emissions from coal mining.
Most relevant to the resources sector is the coal mine waste gas method which will support projects that destroy methane that would have otherwise been emitted to the atmosphere. The method will cover new projects, as well as existing coal mine waste gas destruction projects which increase their emissions reductions beyond existing capacity. Further details are available at here.
DUNCAN V ICAC  NSWSC 1018
The NSW Supreme Court recently handed down its decision in Duncan v ICAC  NSWSC 1018 regarding the findings of the Independent Commission Against Corruption (ICAC) in relation to the circumstances surrounding the award of the Mount Penny mining tenement and the grant of exploration licences over the area to Cascade Coal. The decision is particularly notable for the Court's determination that recommendations made by ICAC (including a recommendation that the NSW Government enact legislation to cancel the Mount Penny exploration licences which ICAC said were "tainted by corruption") were not susceptible to review. High Court challenges have reportedly been mounted by Travers Duncan, Cascade Coal and its wholly owned subsidiaries, Mt Penny Coal, Glendon Brook Coal and NuCoal Resources. More details can be found in the Corrs Thinking Piece about this case here.
REASONABLE LEGAL COSTS
Concerns relating to reasonable legal costs are commonly voiced in the resources sector. Issues include excessive costs, and the fact that costs are often not disclosed until the end of negotiations. Resource companies are also concerned that paying landowners reasonable legal costs gives landowners little incentive to manage their costs or to settle the matter quickly or on commercial terms.
Given these concerns, it is worth considering alternatives around reasonable legal costs and the establishment of disclosure protocols about these costs in order to provide greater certainty.
We have written a new article about Alternative Options for Reasonable Legal Costs in Compensation Negotiations and Potential Disclosure Protocols which follows on from our earlier Thinking Piece about What are Reasonable Legal Costs?
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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