Tinkler held nerve to snare Maules Creek from beleaguered Rio

Nathan Tinkler, rough diamond founder of Aston Resources, can thank the Saville-row-suited Paul Skinner – erstwhile chairman of Rio Tinto, forhis ownership of Maules Creek.

It was in 2007 that the very smooth Skinner– well respected by City of London financiers– championed the peak of the market acquisition of Alcan Aluminium of Canada by Rio Tinto for $44bn.

In retrospect, the buy was a moment of hubris, propelled in part by Skinner’s ego-driven determination that Rio Tinto escape the clutches of suitor BHP Billiton. The wisdom of the Alcan purchase was thrown into stark relief in September 2008 when Lehman Brothers collapsed in New York. With that, the global financial crisis (GFC) flowered, equity markets tanked and credit dried up. Suddenly, Rio Tinto, with debts approaching $50bn, was in serious trouble.

In a bid to escape its financial predicament, Rio unveiled a raft of cuts and asset disposals. 14,000 staff and contractors were fired. A raft of downstream aluminium fabrication and packaging assets, part of the Alcan buy, were put on the block at knockdown prices. Trade sales and initial public offerings (IPOs) were initiated for Rio businesses across talc, potash, Brazilian iron ore, US coal, uranium and gold.

Another asset sacrificed to Rio’s debt pile was the Maules Creek thermal coal project in the Gunnedah Basin, which the company had been exploring since the 1980s. In that time, Rio had drilled some 76,000 metres, identifying a JORC resource of 398 million tonnes.

Rio commenced the sale process for Maules Creek in January 2009, when an information memorandum was distributed.

“They were seeking binding bids by June 2009,” explained Hannigan. “In May 2009, everyone was pricing up their bids. At that time, everyone was pricing in Armageddon, with April the low point of the equity market. Credit markets were closed. Thermal coal was in the $60s, semi-soft was in the high $70s.”

Helping Tinkler’s cause was the fact that other potential bidders, such as Macarthur Coal, Whitehaven and Xstrata, were themselves feeling the pinch.

“Their balance sheets were comprised; they were all looking at emergency rights issue, so therefore when they were bidding on Maules Creek, they were limited in what they could bid,” said Hannigan.

“We were fortunate in that Nathan Tinkler, who was the founder of Aston Resources, had the wisdom, foresight and long term vision to realise that this is the perfect time to buy.”

Showing remarkable intestinal fortitude at a time when others were rendered queasy by market gyrations, Tinkler won Maules Creek with an offer of $480m.

“It’s very rare to be able to buy a deposit like this,” said Hannigan. “If you look at the market and what’s available today, it’s small (projects with) 50m, 60m of reserves. It’s very rare to be able to buy a deposit like this. You have to buy at a market low; you can’t buy in the middle of the market or the top of the market.”Since its acquisition of Maules Creek in2009, Aston Resources has added a further

14,000 metres of drilling to Rio’s efforts. As a result, the company’s understanding of the deposit and the project’s worth have surged.

“When Rio Tinto sold it they only sold it with JORC resources,” said Hannigan. “They sold it with 398mt of JORC resources, today it’s 610mt, and more importantly we now have 356mt of JORC reserves. We’ve done a lot to the deposit since we acquired it.”

Aston now touts Maules Creek as “one of the largest Australian coal deposits” based on its marketable reserves of 321mt (69mt proved and 252m probable), with a project life in excess of 30 years. Mining will be low risk, simple open cut in an area with multiple shallow coal seams with no significant faulting identified. The strip ratio is a low 6.4:1.

The project is leveraged to the metallurgical coal market, with an average expected product mix over its first 20 years of production of 47% semi-soft coking coal, 10% high volatile pulverized coal injection (PCI) coal, and 43% thermal coal.

Significantly, Maules Creek will commence production in 2012 at a time when a shortage of quality hard coking coals is driving steel producers to new coke blends utilizing more semi-soft coking and PCI coals. For example, Nippon Steel has announced development of a new coke oven that has a reported semi-soft consumption ratio of 50%, some 2.5 times the traditional blast furnace consumption ratio of 20%.

Maules Creek will have an in situ ash content of around 12% compared to 25% from the Hunter Valley. This leads Aston to anticipate that its thermal product will attract a 7% premium to the Newcastle benchmark thermal price.

Aston expects production at Maules Creek, commencing in late 2012, to ramp up over three years to a target production of 10.8mtpa of saleable coal – a highly ambitious timetable. The coal handling and preparation plant, which is being designed by Sedgman, will be of 1,600tph, with an average mine yield of 89%.

The project’s capital cost is put at $463m, with major items including the CHPP plant at $212m, and a rail spur and haul and access roads at $99m. The total amount will likely change as Aston finishes project design, and the company has flagged that it could increase its purchase of local farms and properties from $28m to $50m.

Aston is keen to emphasise Maules Creek’s low capital intensity, aided by access to existing port capacity at Newcastle, a main railway line only 16kms distant and use of contractors. Hannigan compared the project’s favourable financials to those of new projects in the Gallilee and Surat Basins which will have to factor in to their costs new ports costing around $3bn to $4bn each, as well as lengthy railway lines.

In terms of costs, Aston puts its FOB cash costs (pre royalties) at $56/tonne, based on the first 20 years of its mine plan, which would put the mine in the second quartile of semi-soft coking and HV PCI producers. In turn, at current coal prices of around US$264/t for semi-soft coking coal and PCI, and US$130/t for thermal coal, Hannigan calculated that Aston’s margin would be A$132.70/t. This would drop to a still respectable $55/t assuming long-term consensus coal prices.

“This is a very high margin mining operation,” said Hannigan.

Bearing in mind these attractive financials, Aston recently sold a 15% stake in Maules Creek to Itochu of Japan for $345m, valuing the project at $2.3bn.

In terms of infrastructure, Aston doesn’t believe that Maules Creek has any pressing problems. On the rail side, ARTC’s decision to de-bottleneck the steep Liverpool Ranges with a twin track rail duplication costing $200m should allow Gunnedah Basin production capacity to rise to 50mtpa by 2015. This compares to current utilization of the Gunnedah Rail System at 5 – 6 mtpa and, according to Aston’s presentations, should see rail capacity stay comfortably ahead of combined forecast production from itself, Whitehaven and Boggabri.

“I don’t see any issues with rail capacity being constructed to meet demand,” said Hannigan.

In terms of port capacity, Aston has accepted a take or pay allocation from PWCS, with 1.7mtpa from 2013 and 5mtpa from the new T4 terminal from 2015. Aston has confirmed that it was offered 10.5mtpa, presumably to match its forecast production, but only accepted the minimum capacity to trigger the construction of T4.

“Aston expects there to be significant spare port capacity at Newcastle from 2011 onwards,” stated a company presentation. It said that the GFC has reduced the number of mining projects under construction or in final planning, while T4 at Newcastle will add over 60mtpa from 2015. It went on to add: “Even assuming highly bullish production growth from NSW coal producers over the next five years, there is still likely to be significant excess capacity at Newcastle. With a surplus of port capacity, the likely outcome is that port entitlements may trade at a significant discount to their take or pay obligations.”