THE LEADING RESOURCE SECTOR INVESTMENT MAGAZINE
AUD $12.00 JANUARY/ FEBRUARY 2014 UK£8.00/CAD$12.90
Incorporating our BIGGEST EVER
south africa’s energy surge
Regional demand fires investment frenzy
New Legend speaks on foreign investment
Oil & gas surge Our biggest ever hydrocarbon spread
fo ll ow
Select barcode from layers
NT growth fuels red tape concerns
Published by: Aspermont Limited (ABN: 66 000 375 048) MANAGING EDITOR: Michael Cairnduff EDITOR: Anthony Barich SUB-EDITORS: Melanie Jenkins, Maxine Brown PRODUCTION MANAGER: Mata Henry SENIOR LAYOUT DESIGNER: Matt Leigh LAYOUT DESIGNER: Catherine Hogan GRAPHIC DESIGNER: Sun Moon
From the Editor’s chair
ADVERTISING SALES DIRECTORS: Australasia – Angela Smith UK/North America – Gareth Hector INTERNATIONAL ADVERTISING SALES: Saithu Nair – firstname.lastname@example.org
Oil & Gas Stocks
Latin American Update
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Rare Earths Update
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Allan Trench is a professor at UWA and Curtin University Business School, and a director of several resource companies
Jacques van Rhyn is International Tax & Transfer Pricing Partner, & National Leader Australia Africa Services Group for Deloitte
Peter Strachan is an analyst and author of the online newsletter www. stockanalysis. com.au
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14: Advance Australia Fair Aussie jurisdictions ramp up their efforts to present Team Australia to the international investment community.
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20: Growing pains As the NT grows as a mining state, some balancing work is in order.
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32: COVER STORY
Can hydrocarbons rescue South Africa’s risk perception? Global investment seems to be saying ‘yes’.
50: Argentinian hydrocarbon enigma Canny investors are moving into the country many still perceive as a no-go zone. 64: Rising from the ashes A new dawn appears to be emerging for South Africa’s beleaguered mining industry.
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COMPANY PROFILES 61: Rum Jungle Resources Three milestones over the past year have Rum Jungle Resources well on the way to transforming 40: Magnum Gas & Power from an exploration company Perth-based MPE is poised to to a producer – with plenty of help trigger the game-changer Botswana needs to become a major exploration upside. hub and even net exporter into 72: Cascade Resources Africa’s energy-hungry southern region – with multiple downstream This gold-focused company is working hard to increase its options to boot. resources and become one of Australia’s lowest-cost explorers 42: Real Energy The numbers more than add up for so it can hit the ground running in 2014. brand new Australian oil and gas explorer Real Energy – indicating that a potential new major has just 75: Kin Mining Western Australia’s latest entered the Cooper Basin. mineral IPO, which succeeded against all odds, has a few aces 46: Cott Oil & Gas up its sleeve to ensure it not only Cott Oil & Gas has inked a gamesurvives in a tough equity market, changing deal potentially leading but thrives. to an LNG project in PNG. This leaves the Aussie junior well and 78: Peak Resources truly ensconced with the big boys An extraordinary MoU with a in the region. major Chinese rare earth producer has proven that Peak 58: Latin Resources Resources stands out from its This Australian junior ended 2013 peers as a genuine player in a on a high and is well placed to particularly tough commodity surge ahead in two pro-mining market. countries in South America. a potential new frontier onshore gas ﬁeld.
26: Cuesta Coal CQC is a rare breed these days: a cashed-up junior with the support of signiﬁcant Chinese partners to help develop a project where a number of well-known majors have been highly active of late.
37: Kinetiko Energy With every drill hole hitting gas, South Africa-based Australian junior Kinetiko Energy is revved up to enjoy ﬁrst mover advantage in
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Image: Artisanal gold workings in Orbis Gold’s Bantou Prospect area
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
A WESTERN AUSTRALIAN FOCUSED
GOLD COMPANY GLENBURGH GOLD PROJECT
DALGARANGA GOLD PROJECT
EGERTON GOLD PROJECT
1.0Moz Indicated and Inferred Gold Resource Mineral Inventory 4.9Mt @ 2.0g/t Au for 316,000oz Processing 1.2Mtpa for 4+ years Annual Production 73,000oz LOM Revenue $448M Operating Cash Surplus $162M C1 Cash Cost per ounce $913 All in Sustaining Costs $994 Pre Production Capital Cost $70.4M Large under explored mineralised system
740koz Indicated and Inferred Gold Resource High Grade Discovery at Golden Wings: Initial Resource of 450,000t @ 3.7g/t for 54,000oz Scoping Study Underway Mineral Inventory of between 7.7Mt @ 1.5g/t and 3.9Mt @ 1.7g/t (depending on development option) Excellent Metallurgical Recovery of +98% High Gravity Gold recovery Several short term development options being investigated
High Grade outcropping deposit (24,000oz @ 6.4g/t resource grade) Deposit remains open at depth 8km of untested shear zone Under explored region with numerous high grade intersections outside the known deposit including 4m @ 72.3g/t and 5m @ 15.9g/t gold Undrilled soil anomalies 2000m x 450m, up to 2,280ppb gold Potential for company transforming size of deposit Within trucking distance of Glenburgh
FROM THE EDITOR’S CHAIR
T’S WITH A SENSE OF IRONY THAT THE COVER STORY FOR our “African Mining Indaba” edition is about the continent’s oil and gas boom, but perhaps this should not come as a surprise. Rest assured, African hydrocarbons will be very much on the radar of the investors and brokers who rock up at Cape Town this month. It may even be mentioned by a few speakers because, after all, energy is what miners need to run their plants. Miners who suffered rolling blackouts over the past 2-3 years would be acutely aware of this. Offshore discoveries in east Africa have indirectly revived South Africa’s fortunes, with Australian expertise in coal seam gas being called upon to unlock coal bed methane (same thing) from its own renowned coal ﬁelds to help plug the supply gap. While China’s increasing middle class has been driving analysts’ talk about what drives Australia’s mining boom, South Africa, along with Botswana, Tanzania and others, are going to need more energy as urbanisation drives Africa’s own phenomenal growth story. This is drawing billions of dollars from oil and gas, as well as renewables, especially in South Africa and even in Morocco, much further north. To be sure, mining explorers and developers from Australia, Canada and elsewhere are still plugging away in Africa. West Africa, the darling of Aussie investment over the past decade, still has plenty of activity, but hydrocarbons on the other side of the continent are deﬁnitely stealing some of the investor hype. Minelife.com.au founder Gavin Wendt says in his analysis of West African Resources in this edition that many West African plays have gone off the boil or fallen off investors’ radar screens. This could be just be the transitional and, dare we say, spasmodic and reactionary nature of the market. But the tough nature of the capital market for juniors – which isn’t expected to get much better in 2014 with commodity prices set to continue their low trends (see analysis to the right) – has also made life that much more difﬁcult for plays in far off countries less familiar to the retail market than those closer to home. Not that this did some local gold plays any good in in 2013, the year of the epic gold crash. And while many miners, investors, brokers and supply side companies won’t touch South Africa with a 10-foot pole, there are signs things are getting better, as Ngaire McDiarmid investigates in this edition. A good place to start in reading the market is where the successful IPOs are coming from. Many of the junior resources IPO of 2013 signed up to proﬁle in RESOURCESTOCKS, from Swala Energy (east Africa) to Fraser Range player Classic Minerals, Leonora hopeful KIN Mining (also in this edition) and, also in this edition, Cooper Basin hydrocarbon hunter Real Energy. Anthony Barich Editor RESOURCESTOCKS magazine
THERE is light at the end of the tunnel for juniors in the long run, even for greenﬁelds projects. So says RFC Ambrian’s Perthbased head of research Duncan Hughes in his Metals & Mining Outlook for 2014 report, which is realistic about ﬂattening costcurves over and subdued prices over the next two years, but much more buoyant further out. This year’s optimism was based on the back of ongoing strong demand from emerging markets and increasing production discipline forced on the industry from investors fed up with growth for growth’s sake which has only brought destruction on miners and burning up shareholders’ precious dollars. “In our view, capital allocation remains the dominant theme across the mining sector,” Hughes said in the report. “The boom years of commodity price appreciation led to many extremely complacent capital allocation decisions. Numerous mining companies destroyed shareholder value through over-priced acquisitions and expensive, poorly executed greenﬁeld projects. “With mining industry cap-ex and average debt levels expected to fall further over the next couple of years, we think investors in large/mid-cap mining stocks are likely to demand the return of excess capital. “The good news is that we expect the door to remain ﬁrmly open for companies able to demonstrate value-accretive growth, preferably with near-term production and an experienced management team.”
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JANUARY/FEBRUARY 2014 RESOURCESTOCKS
& & & &
A leading Australian nickel producer An active, self-funded explorer Established track record of profits and dividends Fully funded for growth www.mincor.com.au
africa Last year’s RESOURCESTOCKS World Risk Survey revealed investors were going where it was cheapest, while balancing risk relative to Australia. With this in mind, the African Mining Indaba conference gives our experts an opportunity to weigh up the most interesting resource stocks there. Damien Warner Financial Adviser Morgan Stanley Wealth Management
tim mccormack Resources Analyst Patersons Securities
1: Papillon Resources (PIR) In 2013, Papillon delivered an impressive PFS on its Fekola gold project. A demonstrated production profile of +300,000oz over 9 years for an all-in cost of ~$725/oz make Fekola one of the most likely development propositions in Africa. 2: Sundance Resources (SDL) Reinvigorating development of its flagship Mbarga-Nabeba iron ore project. Essentially fully permitted, high-quality resources and ore reserves defined. Sourcing funding to build the $C5b Stage 1 integrated mine, rail and port project is the key focus. 3: Tiger Resources (TGS) Is fully funded to complete the expansion of its Kipoi project in the DRC. The project is on time and budget to produce its first copper cathodes in 2014. 4: Universal Coal (UNV) Is on schedule to deliver first production in February at the Kangala coal mine in the Witbank region before ramping up to 2.1Mtpa. Production could quickly increase to 3.5Mtpa if it secures the New Clydesdale Colliery. 5: Regal Resources (RER) Is acquiring 30% of the Kalongwe copper-cobalt project in the DRC. The project hosts an extensive outcrop of high-grade copper-cobalt mineralisation, thick historical drill results and we see good potential for resource growth.
1: Base Resources (BSE) Developing the world-class Kwale mineral sands project in Kenya. Project development is now at the all-important commissioning stage with first shipments scheduled for Jan 2014. Several off-take agreements already in place with some of the world’s largest mineral sand consumers. 2: Perseus Mining (PRU) Gold mining & exploration company with assets in the gold belts of West Africa. Is concentrating on stabilising then growing production from their flagship Edikan mine in Ghana. 3: Sunbird Energy (SNY) Exploring & developing unconventional gas projects in South Africa & Botswana to feed the growing energy needs of southern Africa. Also in the early days of a JV with PetroSA in Ibhubesi, one of RSA’s largest undeveloped gas fields. 4: Kinetiko Energy (KKO) Is also developing unconventional gas projects in southern Africa with major focus on their flagship Amersfoort coalbed methane project south-east of Johannesburg. Progress is evident with several pilot wells already drilled. 5: Pura Vida Energy (PVD) Growing portfolio of projects including the Toubkal prospect in Morocco with its estimated 1.1b bbl of recoverable oil. Recently completed farm-out of interests in Morocco; farmed in to the Ambilobe block in offshore Madagascar.
FACTS AND FIGURES CAPITAL RAISED FOR AFRICA PURPOSE OF CAPITAL ASSET ACQUISITION, 58,578,000
ASSET ACQUISITION CAPITAL EXPENDITURE
WORKING CAPITAL, 14,431,000
CAPITAL EXPENDITURE, 1,252,902,000
DEBT REDUCTION/ROLLOVER DEVELOPMENT
DEBT REDUCTION/ROLLOVER, 24,107,000
EXPLORATION WORKING CAPITAL 0
CORPORATE ACQUISITION/MERGER, 314,884,000
• Calgary, Canada +1 403 202 8683 • Toronto, Canada +1 416 203 0655 • Vancouver, Canada +1 604 647 0016 6
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
peter hayes Investment Manager Alto Capital
jason davis perth regional head BBY
1: Apollo Consolidated (AOP) Announced assays results from soil sampling at their flagship Seguela project in Cote d’Ivoire, showing exceptionally high gold geochemistry. Trenching will continue as part of an earlystage exploration program. 2: Swala Energy (SWE) Engaged independent advisers to assess its Kito prospect in southern Tanzania. Inital findings have been positive, indicating an unrisked resource potential of 12.5-110MMbbl net to Swala’s 32.5% interest. 3: Universal Coal (UNV) Successfully nearing production at Kangala project in South Africa, which is scheduled to begin in February. As at the end of November, a binding offer for a potential acquisition has been received, with details of the offer expected by late 2013. 4: Kogi Iron (KFE) Nigerian-based iron ore developer recently completed a 466Mt indicated resource, giving it confidence to upgrade its studies to a PFS level. Completion of the report in Q4 2014 will provided further details on the economic potential for a mine. 5: Papillon Resources (PIR) Following the end of the wet season, PIR has restarted drilling near their 5Moz gold deposit at Fekola. The program aims to test numerous targets along strike from Fekola, which could present further open pit mining opportunities.
1: Tawana Resources (TAW) Liberian-focused iron ore tiddler with a market cap of $36m. Has a high-grade Itabirite and DSO deposit. Should continue to perform well while the iron ore price remains strong. Well promoted for a small cap, with good support from resourceoriented brokers. 2: Pura Vida Energy (PVD) Very successful small oil and gas company with exploration licences in Gabon and off Morocco. Well promoted and extremely well organised run by Damon Neaves, who has done a spectacular job since listing this company in 2012 at 20c. 3: Paladin Energy (PDN) Previous share market darling that has had to eat humble pie recently, with shareholder unhappiness. With the expected increase in the uranium price over the next couple of years, the share price should react to this price increase. 4: Intra Energy (IEC) Underwhelming performance by this coal stock should start to change in 2014. Has a footprint on the east coast of Africa that should help it move forward as the market expands in that region. 5: West Peak Iron (WPI) Liberian iron ore play, with GWR group as a major shareholder. Has less than $800,000 in the bank, but watch with interest after an inevitable capital raising.
IntierraRMG’s solutions offer unique insights into company evaluations, M&A, risk management, due diligence, competitor intelligence and project pipeline evaluation. Crucially, its sector-specific modules provide tailored, dependable, timely information upon which analysis and decisions can be swiftly and confidently made. For a free demonstration, contact demo@intierraRMG.com CAPITAL RAISED 2013 GOLD/SILVER
COPPER + GOLD, COBALT, NICKEL, SILVER
HEAVY MINERAL SAND
HEAVY MINERAL SAND
PHOSPHATE OTHER 0
• Perth, Australia +61 8 9486 1111 • London, UK +44 0 20 7253 4126 • Stockholm, Sweden +46 8 744 0065 JANUARY/FEBRUARY 2014 RESOURCESTOCKS
COPPER + GOLD, COBALT, NICKEL, SILVER
WHAT’S WRONG WITH EXPLORATION? Digging Deeper this month takes an analytical look at the organisational challenges that can make effective mineral exploration difficult – seeking the views of renowned geologist Professor David Groves.
A greater percentage of school leavers used to immediate ‘digital entertainment’ now go to university, but the practical Honours year is set to disappear and be replaced by more course work. 8
WORDS BY ALLAN TRENCH ALLAN TRENCH is a professor at the University of WA (Centre for Exploration Targeting) and at the Graduate School of Business, Curtin University of Technology. He is also a director of several resource companies. email@example.com
RICKET LOVERS WILL recall the famous jibe of “can’t bat, can’t bowl and can’t ﬁeld” to describe either a hapless individual or even a whole cricket team when things are going awry. Investors in the metals and mining sector – with the notable exception of iron ore – may be excused for thinking up disparaging claims in respect of resources companies. That modern-day resource companies “can’t ﬁnd anything, can’t build new projects, can’t run mines” would be considered by many to be astute observation rather than a targeted insult. Turning to the exploration factor – the perceived lack of new quality discoveries (with rare exception) – Digging Deeper has sought out the views of renowned geologist and Emeritus Professor David Groves as to why exploration success is so elusive. In addition to the obvious technical challenges that accompany exploration, there are also manyfold organisational challenges. Professor Groves points out ﬁve issues that combine to make successful exploration all the more difﬁcult for today’s resources companies. The factors, in short-form (with exceptions), are as follows: 1) A lack of geosciences expertise and exploration mindset at board level in mid-tier to large mineral resources companies; 2) A focus upon acquisition over exploration – where the potentially superior ability of larger companies to explore goes begging; 3) Junior companies remaining hamstrung by a broken funding model; 4) Declining quality in the technical JANUARY/FEBRUARY 2014 RESOURCESTOCKS
and general geosciences training of new graduates by universities; and 5) A lack of mentorship for young geologists in companies. Groves’ opinion is an experienced one that carries weight. Over a distinguished career as an academic and industry consultant he supervised over 250 geological research theses’, including 85 at PhD level, authored or co-authored some 500 publications, and was awarded 11 medals for geological research. His academic studies included many of the geotectonic setting to detailed geology of global gold mineralisation. He has consulted to major and junior companies in most continents, and in recent years assessed the tenements of numerous junior companies for investors and brokers. He explains that the repeated exploration successes of larger mining companies in the past were assisted by technical understanding and support for exploration at board level. “The influence of Roy Woodall in the exploration successes of Western Mining Corporation is an outstanding example,” he said. “Now mining companies think lawyers, accountants and businessmen with no significant training in geosciences are somehow best qualified to advise on exploration from above: It is plainly illogical”. On exploration versus acquisition, Groves believes that larger companies are missing a great opportunity by seeing these as mutually exclusive outcomes – an “either or” conundrum, he said. “Larger mining companies have access to the financial and technical skill sets that show clear potential to create advantage from both M&A and exploration together – but they constantly see it as a choice,” he said. “The answer of course is that they need to create value from both.” Groves sees junior companies in dire straits. “Even when the equity markets were open, many junior company IPOs sat around the $5-10 million mark, which is exactly where they were 15-20 years ago in terms of average capital-raising,” he said. “Of course, that figure now provides far less bang for the buck than it did in the past due to cost escalation from everything from geologists’ salaries through to drilling costs. “Right now of course, equity markets are effectively closed to these companies, anyway.”
Groves also takes aim at the education sector in contributing to the difficulties of feeding skilled geologists into the exploration sector. “The whole system has changed in the last few years,” he said. “Now, 50% is no longer the pass mark in school subjects, with newspaper articles suggesting that an adequate result in literacy and some science subjects is around 35%. “A greater percentage of school leavers used to immediate digital entertainment now go to university. “In combination, these factors lead to academic staff lamenting the lack of literacy and logical thinking and short attention span of students. “Once within the university system, the non-integrated and nongraded unit-by-unit general approach to getting a degree means that students only get limited exposure to the detailed aspects of key technical subjects – and the overall depth of professional learning is diluted by such an approach. “In at least some universities, the jewel in the academic crown, the practical Honours year so envied by other countries, is set to disappear and be replaced by more course work. “Basically, you now get generalists instead of graduates from what was originally a professional degree specifically in geology. “Put simply, today’s graduates are not as well prepared scientifically or technically for exploration as was the case in the past. “There are also fewer Australian industry leaders coming from PhD level trained in problem solving.” Finally, Groves sees another opportunity being missed in mentorship of new explorers. “The FIFO model destroys a large part of the potential for one-to-one mentorship of young geologists by more experienced geologists at mine sites and for near-mine exploration,” he said. “Instead of coaching time that came with workforces residing in small mining towns, the senior geologists and younger geologists now just pass each other at the airstrip in the FIFO model – so mentor relationships are all the harder to develop: “Compare this to the past situation of WMC at Kambalda – the source of numerous highly qualified, successful explorers and exploration managers globally; the crème de la crème of the industry.” Groves’ five factors are certainly
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
food for thought for mining and exploration companies. Add these organisational factors to the technical challenges of successful exploration and you start to see why quality discoveries are so few and far between. Is it time for a radical review of the exploration industry itself? Is there a way to combine the technical excellence and adequate budgets for acquisition of highquality geophysical and geochemical surveys of the majors with the ‘exploration hunger’ and relatively lower exploration costs and lower management overheads of the juniors to enhance discovery? Could the majors, for example, provide guaranteed funding and access to technical excellence to a small group of selected juniors with high-quality ground and wellmanaged staff for an arranged period, say five years, on the basis of a firstrefusal agreement on any significant discovery by the junior? This could be a win-win situation by combining the contrasting exploration ‘drivers’ of each of the ‘partners’. Watch that space.
african mining indaba special
Gone are the days of handshake deals â€“ these days, companies are charged with all sorts of groundless skulduggery, which jeopardises investment. 10
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY JACQUES VAN RHYN
INVESTMENT? A disconcerting growing chorus is chanting a dogma of “tax morality” around how companies handle taxation in the country in which they’re operating. This provides investors with a potentially nasty aftertaste if thorough homework is not undertaken.
LOBAL TAX developments around base erosion and proﬁt shifting (BEPS) may provide companies investing into emerging markets with more risks to consider than those traditionally associated with investing into regions such as Africa. In a previous article in last year’s African Mining Indaba edition of RESOURCESTOCKS, titled The dawn of the UN Transfer Pricing Manual in Africa: Why Australian companies should care, we highlighted the need for companies to take cognisance of the UN Transfer Pricing Manual and why companies operating in Africa should consider its impact. But the increase in political and media attention on tax morality and JANUARY/FEBRUARY 2014 RESOURCESTOCKS
BEPS has had a dramatic change on the global tax landscape. Governments, non-governmental organisations and others have come out in force against what they believe to be tax immoral actions by companies and have named and shamed various large corporations due to their perceived lack of tax morality, notwithstanding those companies fully complying with the tax laws. Mainstream media focused more attention on corporate tax affairs and assisted in spreading the perception that multinationals dodge taxes all around the world, especially in emerging markets.
In February 2013 the Organisation for Economic Cooperation and Development issued its ﬁrst report
addressing the concerns around BEPS. According to the OECD’s 2013 document, titled Addressing Base Erosion and Proﬁt Shifting, BEPS arises because multinational enterprises (MNEs) are often able to artiﬁcially separate their taxable proﬁts from the jurisdiction in which these proﬁts arise. This may lead to the tax base of the source country being reduced or totally eroded. Examples of transactions or structures that lead to BEPS relate to the digital economy, related party debt-ﬁnancing, hybrid transactions, avoiding permanent establishments (PEs) and transfer pricing. Although the OECD, representing its member countries, has been the proponent of the BEPS agenda, the BEPS report was discussed by the G20 ﬁnance ministers in Moscow in February 11
“Governments and NGOs have come out in force against what they believe to be tax immoral actions by companies for perceived lack of tax morality, notwithstanding those companies fully complying with the tax laws.” jacques van rhyn Deloitte 2013 and the BEPS action plan endorsed by all G20 members in July 2013. In accordance with the BEPS action plan 15 key actions are called for around three main pillars: • The coherence of corporate tax at the international level; • A realignment of taxation and substance; and • Transparency, coupled with certainty and predictability.
The 15 Actions are:
1 Address the tax challenges of the digital economy; 2 Neutralise the effects of hybrid mismatch arrangements; 3 Strengthen controlled foreign companies rules; 4 Limit base erosion via interest deductions and other financial payments; 5 Counter harmful tax practices more effectively, taking into account transparency and substance; 6 Prevent treaty abuse; 7 Prevent the artificial avoidance of PE status; 8 Assure transfer pricing outcomes are in line with value creation for intangibles; 9 Risk and capital; 10 Other high risk transactions; 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it; 12 Require taxpayers to disclose their aggressive tax planning arrangements; 13 Re-examine transfer pricing documentation; 14 Make dispute resolution mechanisms more effective; and 15 Develop a multilateral instrument. Actions 6 through 10 call for the realignment of taxation and substance in order to address the use of conduit companies, preventing the artificial avoidance of PEs and preventing treaty abuse and changes to the transfer pricing rules to address intangibles, capital and risk allocation. These issues are important in the context of investing into African countries via intermediary jurisdictions such as Mauritius, the UK, the British 12
Virgin Islands and more recently through the South African headquarter company regime. For service companies undertaking major works in African countries, the rules around the avoidance of PEs, withholding taxes and treaty abuse become important considerations in addition to complying with increased transfer pricing rules which allocate taxable profits. In addressing the BEPS action plan, actions 11 through 14 require governments to develop rules to ensure greater transparency. This may include mandatory disclosure of aggressive schemes, transfer pricing documentation requirements including country-by-country reporting and potentially changes to global tax rules and guidelines – for example the OECD Model Tax Convention. Although most of the BEPS work is undertaken by the OECD, which does not represent developing countries, these developing countries also face BEPS-related issues. In this regard the UN and various nongovernmental stakeholders think tanks and academia will be invited to provide input to the BEPS process.
OECD’s work on Transfer Pricing
In addition to the BEPS action plan the OECD recently issued two consultation discussion drafts on intangibles and transfer pricing documentation. The BEPS action plan calls for the development of transfer pricing documentation that will enhance transparency, country-by-country reporting and the provision of information on MNEs’ global allocation of income, taxes paid and economic activities. On July 30, 2013 the OECD invited commentary on the discussion document, which was published in October 2013 and discussed in November 2013 at the OECD public consultations. Intangibles is one of the most complex areas of transfer pricing and the OECD identified this as an area for further clarification and work in its first discussion draft issued in 2012. Based on the commentary received and discussions during the public
consultation process, the OECD issued a revised discussion draft on transfer pricing aspects of intangibles. The discussion draft contained an addition of a section addressing features of the local market, location savings, assembled workforce and corporate synergies. It also proposed changes to the definition of intangibles, adopting a more transactional approach while preserving a clear focus on the importance of functions performed, assets used and risks assumed. The inclusion of a section on transfer pricing aspects of the use of corporate names is also proposed. As per the documentation work, commentary was sought and published for public consultation.
Role of IMF in International Taxation
According to the International Monetary Fund, transfer pricing is one of the most urgent challenges for revenue authorities in developing countries. The IMF is of the view that its role is to assist developing countries in applying transfer pricing rules. The IMF provides advice on how to design transfer pricing rules and how to implement the rules. Specific advice is provided on the application of the arm’s length principle in the context of developing countries. Issues such as location savings, geographic adjustments, risk stripping schemes, intangibles and documentation are specifically considered in the context of developing countries.
The tax landscape is not only changing in developed countries. The OECD, UN and IMF have identified the need for improved tax compliance in developing countries. South Africa, Brazil, China and India are at the forefront of tax developments in these developing countries. In recent years various African countries have introduced transfer pricing legislation and increased tax compliance requirements. Companies investing into Africa should ensure they stay abreast of developments around BEPS as this encompasses most tax issues that companies and countries will face in their interaction. South African-born Jacques van Rhyn is Deloitte’s Perth-based international tax and transfer pricing partner and national leader of the Australia Africa services group.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
RAMPING UP PRODUCTION OF HIGH QUALITY FERROTUNGSTEN Specialty metals focused with the ability to expand into other niche opportunities.
Hazelwood owns a majority interest in the ATC Ferrotungsten Project in Vietnam. ATC entered production in 2013 and is ramping up production of high quality ferrotungsten. Ferrotungsten is used in high speed steels, tool steels and temperature resistant steels.
The product is sold globally to steelmakers and foundries via specialty metals trader Wogen. There is potential future vertical integration with Hazelwoodâ€™s advanced tungsten projects in Western Australia.
VIETNAM ATC FERROTUNGSTEN PROJECT PRODUCT SOLD GLOBALLY MAXIMUM CAPACITY 4,000 TPA
WESTERN AUSTRALIA MT MULGINE TUNGSTEN PROJECT BIG HILL TUNGSTEN PROJECT EAST PILBARA EXPLORATION
LEGEND IN MINING INTERVIEW
FRONT For a decade now, Australian jurisdictions have been fusing their competitive tension to present ‘Team Australia’ to the international investment community. Things have been ramped up of late with the dire situation explorers find themselves in.
An inter-state and territory delegation has been targeting key foreign resources conferences to push investment in Australia.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY ANTHONY BARICH
HEN PAUL Heithersay won the RESOURCESTOCKS Legends in Mining award at Mines and Money Australia in October, it was as much a nod to the collaboration between Australia’s jurisdictions as it was for his team’s efforts in keeping South Australia a leading exploration destination. Dr Heithersay, deputy CEO for Resources and Energy for the SA government’s Department for Manufacturing, Innovation, Trade, Resources and Energy (DMITRE) is also CEO of the Olympic Dam taskforce, a steering committee set up to guide the potential expansion project through the necessary regulatory obstacles, as well as a public service medallist. He is the ﬁrst to admit that the heat is on state and federal governments to reduce risk. This is specially so with juniors struggling to survive, let alone gain the ﬁnancing to do what majors aren’t doing much of any more – making discoveries that are the future of Australia’s economy, along with many others. “It also then puts light back on both state and federal governments to do what they can to keep providing pre-competitive data for juniors to raise money,” Heithersay told RESOURCESTOCKS. “The majors aren’t doing the big regional surveys they used to do, and we’ve been relying on juniors to make the discoveries, but they are reliant a lot more on government Geological Surveys generating the broad data to hone in on. “It’s not so much sovereign risk because nobody will take away tenements, it’s more about red and green tape, making the rules and regulations clear. Our motto in South Australia is ‘we want to be moving at the speed of business, not the speed of government’, so that decisions get made that are not only clear and transparent but fast.” Despite his title as deputy CEO, Heithersay has been a long-term spearhead of everything mining in SA when it comes to the government interface. He has always been unashamedly pro-mining, reﬂecting and implementing the initiative of previously long-serving resources minister Paul Holloway and now his energetic protégé Tom Koutsantonis. Heithersay is a highly recognisable ﬁgure both within SA and JANUARY/FEBRUARY 2014 RESOURCESTOCKS
BHP Billiton’s Olympic Dam project.
nationally, as many other states have used the state’s initiatives as a benchmark when promoting exploration and mining activity. Chief among these initiatives has been the Plan for Accelerated Exploration (PACE), which has been lauded for driving exploration investment in the state and responsible for delivering a significant improvement in its potential project pipeline and the subsequent economic development outcomes that follow. Heithersay is a truly unique individual in Australia when it comes to mining related bureaucrats – perhaps as a result of his previously successful career working at a senior level within the industry itself: 25 years with Geopeko, which merged with North Broken Hill [later North Limited], which Rio Tinto then duly bought for its iron ore assets. He ended up as exploration manager for Australia and Asia for North Limited, having a ball trekking the world looking for a variety of deposits. However, there’s nothing fun about what most junior explorers across both the mining and hydrocarbon space are going through. This was highlighted by a Grant Thornton junior mining and exploration survey report issued late last year warning that many of them won’t survive, with almost
half estimated to hold less than $A2 million cash. While South Australia could hold its head high in doing its bit for juniors, topping all other Australian states in RESOURCESTOCKS’ World Risk Survey for the past four consecutive years, there has been a major push across the board in Australia to streamline approvals processes, while carefully balancing environmental responsibility and community concern. Even with SA’s success, it pales to Scandinavian and Canadian jurisdictions in RESOURCESTOCKS and other prominent risk rankings, such as the Fraser Institute survey – something Heithersay sorely wants to rectify. But he sees the bigger picture as the more important focus. “It’s counter-productive to say ‘we’re going to try to lift South Australia away from the other states’,” Heithersay said. “The whole boat has to lift to achieve that. “Some of the other states have taken some of our initiatives and made it their own and they have acknowledged that, and we’re always looking over the fence to see what’s going on, and if it’s appropriate for us we’ll do the same thing. “That’s a healthy tension to have. “We certainly see the
Scandinavian and Canadian jurisdictions as our key competitors. “The Scandinavian countries always seem to do very well, and there is a lot to learn from their commitment to online geophysics and systems that they use. “We like to pride ourselves on ours, but we’re forever looking around the world for what else we can do from other jurisdictions that appear to be doing it better. “The Canadian jurisdictions are higher up the chain than South Australia in the policy potential indexes or mineral potential indexes. “We have quite a close relationship with Saskatchewan, both being uranium producers, so we try to compete at collaborate and learn off each other to make our jurisdictions more competitive. “We really do aspire to lift Australian jurisdictions further up the value chain.” Saskatchewan sent geologists to work with SA’s Geological Survey looking at sedimentology and sequence stratigraphy in the state’s basins, while SA sent geophysicists to Canada to help them image the Athabasca Basin. SA also has a similar memorandum of understanding with Chile to develop the Croweaters’ expertise in copper exploration and large-scale mining as part of a two-way exchange
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
with the Latin American mining giant. Intra-state Australian resources department delegates first started presenting a united front at the Prospectors and Developers Association of Canada (PDAC) conference about a decade ago, then China Mining. More recently the group, known affectionately by those who go as “Team Australia”, also travelled to Korea and Japan together. On the hydrocarbon side, a similar delegation has recently been attending the oil and gas version of PDAC – NAP [North American Prospect Expo] held annually in Houston. South Australian and Queensland petroleum geologists have also been working with the US Geological Survey and Geoscience Australia on an ongoing project to better understand the Cooper Basin, which crosses the states’ borders. There is often a large discrepancy between what the US Energy Information Administration (EIA) and the USGS come up with in regards to the hydrocarbon potential of Australian basins. The collaboration helps to redress that. While mining has been prominent in SA for over a century, it is oil and gas where SA is making major inroads to “lift the whole boat” of Australia, as Heithersay says. While the shale revolution that has transformed the US sparked the investment frenzy in South Australia, Western Australia and the Northern Territory, the reality is that the geology and readiness of the exploration and especially service industries are poles apart. While it took the US some 20 years to get to where it’s at now, one WA oil and gas contractor, an industry veteran, told RESOURCESTOCKS the local industry has about five years or we’ll miss the boat, with too much competition from LNG exports and other energy solutions will be found if the gas is too expensive onshore. So while Australia has and must continue to welcome multinationals such as Halliburton, Schlumberger and Baker Hughes for the high-value niche areas such as those currently doing the work in the Cooper Basin, Heithersay is acutely aware of the need to open up the value chain so locals can get a look-in as well to make drilling more affordable for explorers. SA is doing this by developing “clusters” – hubs of innovation and training. One is already well
“It’s counter-productive to say ‘we’re going to try to lift South Australia away from the other states’.” DR PAUL HEITHERSAY DMITRE underway at the old Mitsubishi site at Tonsley Park, which is being redeveloped. Local companies are already basing their operations there, with university graduates flowing in, while Flinders University and TAFE have already built complexes there. “We are trying to emulate the Norwegian model by developing clusters,” Heithersay said. “We have an area which is the old Mitsubishi site at Tonsley Park which is being redeveloped, and we have Flinders University and TAFE have both got new complexes there, we’re developing an oil and gas training hub there. it’s the first cab off the rank as a precursor to a larger mineral and energy services cluster there. “While we don’t have a ‘sovereign wealth fund’ to control traffic like Norway does, we can put things in front of companies to make it an attractive proposition to develop networks and clusters in key areas in Adelaide to support them.” DMITRE’s petroleum executive director, industry veteran Barry Goldstein, has developed a major body of work called the Roadmap for Unconventional Gas in SA, which now has 330 companies and individuals part of it, looking at the entire value chain for unconventional gas and identifying the problems that need to be solved. “In that way, we’re exposing the entire value chain to anybody who wants to participate, and identifying key areas of capability, and we as a government in conjunction with industry are focusing on the areas that have the highest bang for buck and focus on those,” Heithersay said. This unconventional gas training hub is planned to be the first cab off the rank, so if you’re going to work in the Cooper Basin, you can get a ticket that allows you to work for Beach Energy, Santos or Senex. Companies have chipped in to set the program up, as has the SA government. “We’ll develop one or two of those industry hubs focused on unconventional gas, and we hope to do the same for the mining sector as well,” Heithersay said.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“The unconventional gas is kind of new territory for a lot of us, so we’re sending teams and companies across to the US to learn what’s needed in the supply chain – like fraccing sand and fraccing fluids, where do you source them, and expose that to companies here so we can get some local source of supply that can suit everybody.” On the mining side, the SA government was one of the firstmovers to get the Deep Exploration Technologies Cooperative Research Centre [DET CRC] based in the state, at Boart Longyear’s premises near Adelaide Airport. Using Brukunga, an old government-owned quarry in the Adelaide Hills, as the R&D and training hub, the CRC is trying to develop lower-cost drilling technologies and ‘lab on the rigs’ – to measure geochemical and geophysical elements during drilling or soon after, so decisions can be rapidly made about where to drill next. The CRC has also been working on harnessing the coil rig technology used in the unconventional gas space, replacing a number of drill rods with one continuous carbon fibre tubing, which can potentially drill much faster and hopefully at a much lower cost than industry currently does. A coiled tubing [CT] rig prototype was launched on November 22 which increases safety and maximises the time the drill bit is at the bottom of the hole drilling. While the prototype rig uses steel tubing, DET CRC said it would experiment with innovative tubing materials such as carbon fibre. But wait, there’s more. Scanning technologies are also being developed – through AuScope and the National Collaborative Research Infrastructure Strategy [NCRIS] funding, hyperspectral work is being done, looking at how big an alteration footprint does an Olympic Dam-style deposit have, and therefore what sort of drilling spacing do you really need to detect whether you’re in the ballpark or not. “That’s also tied to the deep drilling technology that we’re bringing to the table,” Heithersay said. At the end of the day, he said, 17
The Investigator Resources board at the company’s Paris silver deposit on the Eyre Peninsula, South Australia.
investors don’t care about investment risk of speciﬁc states. If they want copper they’re going to go looking in South Australia and Queensland; if they want uranium they have a few choices. “The key thing is we need overseas investment from China, Canada, everywhere, so we want to compete on a global basis,” he said. “We want to project our geology in the best possible way, which is why the state Geological Surveys spend a lot of money gathering precompetitive data and getting it online, and we all compete and collaborate in that space. “All of us, within our own jurisdictions, are trying to reduce red tape and reduce and simplify the processes. “We want people to get on the ground, drill early, drill fast and get to a mining lease as fast as is humanly possible, while ensuring that the process ensures the highest environmental outcomes. “All the jurisdictions around the Australia are doing their best within their own legislative framework to do just that.” With the “asset of Australia to
work with”, the question becomes how to present that in the best possible way, then making it easy for people to make the investment when they get here. “What we do in SA doesn’t necessarily translate to other jurisdictions, but the general intent is: you want a proponent to come in and see someone who’s accountable, who can handle most things for you, and the federal government has picked up on that too,” he said. “Federal Resources Minister Ian Macpharlane has mentioned that as a very desirable characteristic. “By having that sort of leadership, we can then streamline our processes, challenge overlaps where they occur and improve the overall scene.” The need for this certainty, he said, becomes “far more stark” because of the issue juniors are going through right now where ﬁnancing is extremely tough. “They want to spend every cent in the ground, not on stuff that’s not productive, and we agree with them. So we want to ensure they can get most of their money in the ground while keeping the community onside,” he said.
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JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Paris silver resource at the forefront of a new mineral belt in South Australia Drilling at the Paris Silver deposit, Eyre Peninsula
ASX Code: IVR
IVR Indaba Special Edition full page advert_dec13.indd 1
8/12/13 12:28:55 PM
NORTHERN TERRITORY FOCUS
NT: QUICKSAND OR
Risk money in quicksand: As the NT grows in popularity, it risks being bogged in increasing red tape. 20
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY ANTHONY BARICH
The Northern Territory remains one of the best jurisdictions in Australia to develop natural resources. The challenge as it grows as a mining state is to balance the growth needs of juniors with environmental and economic responsibilities – despite the hiccups.
INING AND oil and gas players across the market capitalisation spectrum agree that the Northern Territory is a great place to do business, leading to it coming close to topping South Australia in the RESOURCESTOCKS State Scorecard last year – but the investment community is a ﬁckle beast. Oil and gas majors ConocoPhillips and Inpex have already made the NT their home and the Territory enjoyed several years of uninterrupted growth in mining exploration spending – bucking the trend of the rest of Australia – until 2011-12. KGL Resources is developing its Jervois copper project in the NT. Managing director Simon Milroy used to live in the NT 20 years ago, working at what is now Newmont’s Granites gold mine – one of Australia’s largest gold mines – in the Tanami desert to the northwest of Alice Springs. He sees evidence of a thriving NT around the Arunta area where Jervois is located. Rox Resources has taken some ground immediately to the west of KGL doing aerial surveys, Mithril Resources is to the south and Kidman Resources is to the northwest drilling out a very similar orebody to Jervois. Arunta Resources has been doing some drilling and Thor Mining’s Molyhil project is to the west. “There’s a fair bit of activity and active drilling in the region, which not many parts of Australia can claim at the moment,” Milroy said late last year. “The NT has a very similar project to South Australia where they co-fund exploration drilling. The Geological Survey is currently doing detailed mapping over our Jervois block. “Things like that add enormous value. It’s great to see the government spending money on things that directly beneﬁt industry – and they’re doing it deliberately.” JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Milroy was also stunned by how fast its Rockface mine management plan was approved – two weeks. “In most places you can’t get anywhere near that,” he noted. Storm clouds gathered last year, however, when the NT government, seemingly in an attempt to right past wrongs by the mining industry, introduced a rehabilitation levy that naturally set the Association of Mining and Exploration Companies alight with fury. AMEC eastern states and NT regional manager Bernie Hogan, however, took a more nuanced approach when he recently spoke about the NT to RESOURCESTOCKS. “I would take a measured approach on it and say the NT has wonderful opportunities. However, the government is not yet fully engaged with the industry,” he said. “They have something like 18 different projects at various stages in development or moving into production in the next couple of years. That’s great – you want those kinds of numbers for a small mining state but they’ve got to ensure they’re sending clear and consistent messages to the market. “[The NT] is sold very much as ‘it’s as good as South Australia’ and the track record is that it is open for business – its Geological Survey is really well regarded.” However, Hogan pointed to a couple of occasions in 2013 when government policy had been changed, such as the environmental levy being implemented, with little consultation with the wider industry. “As the industry is not that big in the NT, a large proportion of their projects are owned by companies that aren’t based there, so they need to keep that in mind and consult more widely,” he added. “While that may only affect a small part of the industry, it affects the certainty and conﬁdence of the entire investment community. 21
Diamond core drilling at Ferrowest’s Yalyirimbi iron project in the NT.
“A similar issue occurred with the seabed mining. While that’s been under moratorium, the CLP [Country Liberal Party] government said it would assess and address it. “It then became a general reservation, not a moratorium, which essentially made tenure worthless – anyone who had a title to explore those waters became worthless. Again, the unintended consequence is it sets a precedent. “The two priorities for the NT must be investor confidence and sending those clear, concise and consistent messages that don’t concern investors. “The other thing is looking at capacity when it comes to infrastructure, ensuring that there is third-party access and ensuring that there is sufficient capacity to encourage that investment.” Meanwhile, Ferrowest recently announced a resource upgrade to 13.3 million tonnes of haematite at 27.1% iron for its Yalyirimbi iron
project. MD Brett Manning told RESOURCESTOCKS that his NT experience had been overwhelmingly positive but he was concerned about some trends. “The rehabilitation levy was a bit of a blunder, because if you look at the model Western Australia has just put in place, it’s absolutely brilliant – a win for everybody,” Manning said, whose company also has five projects in WA. “The NT could’ve done the same thing and just dropped the ball on that one. “What we’re seeing is over 100 years of mining that wasn’t rehabilitated and there’s some legacy mines that really need work that are beyond the funding ability of the state governments to do – but are becoming more obvious to do. “They’re matters that won’t go away, to bring the rest of the state/territories back into pristine condition. So the modern miners are paying for the previous ones. I guess we weren’t as environmentally savvy
“The rehabilitation levy was a bit of a blunder, because if you look at the model WA has just put in place, it’s absolutely brilliant – a win for everybody.” BRETT MANNING FERROWEST
in those days but the reality is it was government policy, not miners, that caused that problem in the first place. “At least under the WA system they came up with a way of making it better for the miner to take a bit of poison but it also means they’re effectively building up a fund that takes a while, then it runs on the interest from the fund, so in the future we won’t be paying for it, it’ll be self-funding.” The creation of the Environmental Protection Agency was a positive but industry will be keeping a close eye on how that’s administered. In the petroleum space, the NT has reviewed its administrative procedures, streamlining them by removing as much red tape as possible, which should speed up the grant processes. The NT government has also streamlined the environment requirement side, using EPA guidelines and incorporating them into the departmental environment plans, again reducing red tape. “We’ve done a lot of communications with all industry,” an NT Mines and Energy Department senior source told RESOURCESTOCKS. “There are a few small companies in the petroleum side because most of them have joint ventured with multinationals.” Hogan said the NT was becoming known as a good area to explore.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“Associated with that, we feel like there’s more regulation coming in, which is counter-productive to its attractiveness,” Hogan said. “AMEC definitely doesn’t support cowboy actions. However, it’s got to be good regulation, which is outcomes-focused, not just loading up the front-end of any project.” Overall, Manning still believes the NT is a much easier jurisdiction compared to WA, which he said had a very regimented and well-developed mature system but also tended to be bureaucratic rather than effective in trying to promote and facilitate exploration and mining. While the federal Aboriginal Land Rights Act, which gives land councils the right to veto mining applications for five years, has been acknowledged by both the NT government and industry as a major stumbling block to growing the resources sector there, Manning said he found dealing with the Central Land Council very professional and organised. However, should the land councils have issues then they also had the ability to make it very hard or onesided. “Good communication is the key, whether you’re dealing with the land councils or native title holders directly,” Manning said. “You need to do both, particularly in the NT where the land councils have a lot of power and you need to work with them, communicate with them exactly what you’re doing as early as possible and keep those lines of communications open. “We always have the practice of trying to get the locals on the ground as much as possible and the native title holders, so it’s got to be a two-pronged approach. The land councils have a lot more sway over the big picture than they possibly do in WA where they can or may not be involved but in the NT they are always involved.” Manning was stunned when the NT Geological Survey in Alice Springs actually invited Ferrowest in for a chat about how it could help out. One concern about Alice Springs, however, was the lack of support services for the mining industry. With the NT running an enquiry into its energy future, Hogan said the biggest territory constraint was infrastructure for things like power and water. It was highlighted in November when Rio Tinto blamed the winding down of its struggling Gove alumina plant on NT Chief Minister Adam Giles cutting the amount of gas
“There’s a fair bit of activity and active drilling in the region, which not many parts of Australia can claim at the moment.” SIMON MILROY KGL RESOURCES the government would secure for the refinery as a substitute for higherpriced diesel. Ord River Resources CEO Frank Zhu said juniors in the NT needed serious help just starting up, by way of funding to help pay legal costs to deal with the land councils and infrastructure, even suggesting that the government facilitate a cooperative approach between local operators to attract investment for infrastructure. “We need help, otherwise we’ll create no jobs, revenue or tax. We have to pay a decent percentage of exploration capital to the Central Land Council – that’s money that we can’t afford,” he told RESOURCESTOCKS. “The traditional landowners definitely deserve to have a share of the industry but the question is the structure. This ‘pay as you go’ process makes it very difficult to start.” The NT Mines and Energy source noted that while land access was an issue for miners, federal legislation did not make it easy, as it did not allow the NT government to get involved in negotiations. Under the Aboriginal Land Rights Act and the Native Title Act, the negotiations are between the land councils, which are the representatives of the traditional
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
owners, and the companies. The NT government is not invited to most meetings. Zhu’s project acutely illustrates the infrastructure issue. “We’re talking about the Tanami desert, where it takes 10 hours to drive from Alice Springs to our project in the northern Tanami,” he said. “It’s not a very big government, so I understand it doesn’t have a lot of capital to spend on infrastructure but they need to realise this is a very big area with a lot of potential. There should be a lot more projects. “Why do our approvals take the same amount of time as a big LNG project? For a small-scale mining operation, mine and waste management plans, etcetera, to take two years – it kills you. So the government gets no revenue, no jobs are created, companies go bankrupt and you move on.” Ord River recently farmed in at 75% to the Plutonic Dome gold project, 20km from Sandfire Resources’ DuGrussa copper-gold mine in WA. Zhu said the area was light years ahead of the Tanami. “In that area you’re able to have a 365-day-a-year operation, roads are already built, mining leases granted, processing mill next door, Mt
Cattle on a farm near Ord River Resources’ gold project in the Tanami, NT.
Ord River Resources deputy chairman Bruce McInnes at Suplejack during 2012 drilling.
Newman airport two hours drive away, I can pick up a rental car. I don’t have to carry 3-4 extra tyres in case I have a breakdown,” Zhu said. “The government needs to tailor the policy for the various juniors – which I think it understands – it just takes time with their very limited resources.” The NT Mines and Energy source said while exploration approvals were usually “fairly quick”, it was mostly the support services that couldn’t cater to the mining industry, with drilling rigs and the amount of people involved. That’s where the government was encouraging people in businesses. “We partner with companies to make sure approvals are combined among departments as much as possible,” the source said. “And if there is any type of approvals process for a mine or some sort of venture, we make sure the red tape is cut out of the way. “But at the end of the day, infrastructure itself – roads, etcetera, depending on where the mine is – is still the responsibility of the company.
“We’re also looking at priority zones for mining and petroleum – putting more focus on certain areas where we will be coordinating our different departments to put more focus on where the more prospective areas are and where there is potential, so that when the roads and other infrastructure are looking at doing upgrades that the money goes where there will be – or possibly will be – some sort of return. “It’s well known where the most prospective areas are, it’s getting industry to spend the money. But also getting various government departments to join forces to concentrate on those areas rather than just doing an overall area.” While Zhu emphasises that his overall NT experience is “pleasant”, it’s also tough. Weather issues restrict drilling to a 3-4 month window for drilling – “or any real work” – so costs are high. “We’re operating pretty much in the middle of nowhere. We’re on a cattle farm and I have to say the leaseholder
“It’s a spiral of economic development – as they get more sophisticated they need to ensure they don’t lose their entrepreneurial spirit.” BERNIE HOGAN AMEC
is very supportive, because we hire several members of their family to work for us, which generates an income for them,” Zhu said. Manning said energy was “constantly on the mind” of miners and explorers. “It’s something they’ve got to get right,” Manning said. “Projects like ours and some of the bigger ones, like rare earths, they quite often need decent processing plants, which can mean natural gas and there are natural gas pipelines available.” So the critical questions he asks are whether the infrastructure is enough, whether there are sufficient energy reserves and whether enough is being done to increase the reserves. “Those sorts of things are really going to play into whether we can get some much larger mining operations going in the NT other than uranium,” he said. The Territory certainly knows its uranium history is one of its biggest drawcards going forward – verified with NT Mines Minister Willem Westra van Holthe saying in November that he would meet his federal counterpart to discuss ways to streamline environmental approvals for uranium exploration. “We do not need mining operations to have to go through multiples stages of approval in order to get these mines up and running,” he said. Industry’s response is: that’s great – but what about the rest of the industry? While energy security for mining is an important issue for industry, Hogan says “the first, second and third priority is access to capital at the moment”. “While energy security is an important issue for them to go forward, most of them are concerned about getting the funds to drill holes in the first place,” he said. The problem is, having the funds partly depends on investor perception of the jurisdiction. “So it becomes a circular argument that says ‘we need to drill holes, which means we need the government to be acting responsibly, therefore we can’t have over-regulation, therefore we need some sort of long-term security in our energy security/ infrastructure and taxation regimes … that will lead us to getting more money to drill holes’,” Hogan said. “It’s a spiral of economic development – as they get more sophisticated they need to ensure they don’t lose their entrepreneurial spirit.”
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
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chinese take a shining to well-funded junior Cuesta Coal is a rare breed these days – a cashed-up junior with the support of significant Chinese partners to help develop its project where a number of majors have been highly active of late. Anthony Barich reports.
oal developer Cuesta Coal is well positioned for a big year in 2014, having achieved a series of milestones in 2013 that have the company on track to successfully produce first coal by 2016. A close look at the company’s major backers will show Beijing Guoli Energy Investments subsidiary Longluck Investments has been on Cuesta’s share registry since it listed in 2012 and owns 36% of the company as its top shareholder. More recently, Hong Kong-based mining investment firm Hanford Holdings was brought on board, having invested $8.5 million for 19%, while Cuesta’s management has 12.5%. Cuesta completed the second tranche of the Hanford Holdings transaction the day founder and managing director Matthew Crawford spoke to RESOURCESTOCKS in late December. So when Crawford declared “we’re a cashed-up junior, which is pretty rare at the moment”, it’s a significant statement, especially in the current market where many juniors are struggling to keep the lights on, let alone being able to actively progress their projects towards production at the same rate as Cuesta. “We’re a well-funded junior with two large Chinese cornerstone investors to underpin our capital requirements for all development moving forward,” Crawford told RESOURCESTOCKS. “It is very beneficial to have the two major Chinese investors on board because they understand the mining industry and the coal market. We will also be assessing a potential offtake agreement in the next six months. “The process will include 26
discussions with Beijing Guoli and they will have some important negotiating influence and substantial contacts in China. “Having two substantial Chinese shareholders on the board as part of the company has also given us a really good insight into what’s happening with coal demand in China. It’s actually a big benefit in understanding the demand cycles for coal.” For the past 12 months Cuesta has been focusing on its flagship Moorlands thermal coal project in Queensland. It completed a 50-hole exploration program prior to this edition of RESOURCESTOCKS coming out in February and this program will allow Cuesta to move into a bankable feasibility study in the first quarter of 2014. In the lead up to the BFS, Cuesta has completed a scoping study that revealed the details of a 1.9 million tonne per annum open cut mine at the proposed Moorlands South Pit for at least 30 years. “The key drivers for the economics are a low stripping average of 3.2:1, excellent yield of around 90%, which gives us a free-on-board cost of $63 per tonne excluding royalties. So we’re definitely in the lower quartile,” Crawford said. The project’s development capital costs are estimated at $148 million including the coal handling and preparation plant, rail spur and train load-out facilities. Importantly, the project is in close proximity to existing infrastructure as it is well-placed in an active coal mining region. Speaking of which, there has been significant corporate activity in Cuesta’s neighbourhood in recent months.
A joint venture between Glencore Xstrata and Sumitomo spent more than $1 billion acquiring a 50.1% stake in the 12Mtpa a Clermont coal mine from Rio Tinto. Having started production in 2010, it has a remaining mine life of about 13 years. In addition, rising Australian company Linc Energy acquired the old Blair Athol mine, which is only 14km from Cuesta’s Moorlands project. Blair Athol has 46.1Mt of JORC resources and 11.3Mt JORC reserves. Linc has proposed to recommence production in June 2014, with mining having ceased in November 2012. To put the neighbouring Blair Athol project into perspective, Linc had the asset valued at $181 million in November last year. The bonus is that Cuesta’s Moorlands project has very similar coals to both Blair Athol and Clermont. “It gives the company quite a bit of confidence that majors like Glencore and Sumitomo would invest in the region,” Crawford said. With a number of burgeoning projects in close proximity, the infrastructure options for Cuesta are plenty and will make life significantly easier once its flagship project comes online. The potential also exists for the company to leverage off existing rail loop infrastructure at Blair Athol. There is a dedicated train load-out, rail loop and spur connected to Wotonga-Blair Athol branch, plus a private 11km haul road to haul coal to train load-out so haulage options can be optimised. Coal can be railed to Dalrymple Bay coal terminal or Abbot Point coal terminal.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“We’re a wellfunded junior with two large Chinese cornerstone investors to underpin our capital requirements for all development moving forward.” Cuesta is also in negotiations to secure long-term port allocation from the existing user at DBCT. The company is also evaluating port allocation options beyond 10 years, which speaks to the substantial potential of Moorlands. Importantly, Cuesta has representation from its major investors on the board and has beefed up its in-house personnel to get the job done. In the past 12 months, Cuesta appointed Brian Johnson as nonexecutive chairman. “We appointed him because he’s been involved in a number of resource start-up companies where mines have been brought into production, founding Mt Gibson Iron, Portman and he was a major shareholder and chairman of South Blackwater Coal in the 1980s,” Crawford said. Keith McKnight and Crawford are the two founders and executives on the board, while Megan McPherson has been chief financial officer since the company was listed in 2012. Just over a year ago Cuesta also brought in Blair Richardson, an experienced coal executive in Queensland, as general manager of exploration and development. Richardson and McKnight are heading up the development of Moorlands and Crawford said the pair were working extremely well together and had a good team under them. Richardson has been involved in a number of mine start-ups for New Hope Coal, Rio Tinto and BHP Billiton, so has significant experience to meet the demands of bringing Moorlands into production. Cuesta also has a JV with QCI, a wholly owned subsidiary of Hancock
Prospecting, in a Snake Creek JV in the Eastern Galilee Basin. As part of the deal QCI will spend $3 million to earn 51% in two projects. With the BFS scheduled to commence at Moorlands in early 2014 the company is hoping to obtain the mining lease in 2015 then produce first coal in 2016. Another major milestone due for completion in 2014 will be the delivery of an expected resource increase in Q1 from its 2013 exploration program undertaken at Moorlands. “The exploration we’ve completed in 2013 was designed to define an indicated resource over the entire deposit,” Crawford said. The Moorlands deposit is divided into the North and South pits, with Cuesta having undertaken infill drilling between the two deposits, which will form the basis of the anticipated resource upgrade. Crawford said the south pit had the lowest stripping ratio of any coal project owned by an Australian junior. Importantly, the CHPP will be located adjacent to the pit, with an impressive expected overall yield of 90%, a very high recovery rate which means there is little loss of coal. South Pit has several benefits, according to the recently completed scoping study. The cumulative coal thickness is up to 40m with an average of 25m, it has shallow coal in thick seams amenable to simple truck and shovel mining operation, it has a simple mine schedule – north to south mine plan minimising out of pit dumps – and a mine design that minimises rehabilitation liability at mine closure.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Matthew crawford cuesta coal Project geologist sampling core from the proposed South Pit at Moorlands.
cuesta coal at a glance
Head Office Suite 15.01, Level 15, 31 Market Street Sydney NSW 2000 Australia Ph: +61 2 9284 5900 Fax: +61 2 9284 5999 Email: firstname.lastname@example.org Web: www.cuestacoal.com.au Directors Brian Johnson, Matthew Crawford, Keith McKnight, Brice Mutton, Patrick Elliott, Huaixi Zheng, Ruoshui Wang, Hanping Liu Market Capitalisation $A37.5 million (at press time) Quoted shares on issue 375.3 million Major Shareholders Longluck Investment (Australia) 36.42% Hanford Holdings 19.98% Albion Ballymore 12.54% Argonaut Resources 4.46% New Mangrove Resources 2.17% 27
HAS US COAL FINALLY
REACHED ITS PEAK? We have been hearing for years that US coal has a long life ahead, some 200 years or more based on reserve indications from industry number crunchers. But what if this was not the case? What if we were forced to undergo a paradigm shift based on estimates of 20 years or less?
OLORADO-BASED group Clean Energy Action, which forthrightly proclaims that one of its main goals is to accelerate the transition to the postfossil fuel world based on clean energy, recently raised eyebrows with a report suggesting that federal estimates may be overstated, that our “peak coal” years have passed and that the rocky road we have been following will only get more rough. The Warning: Faulty Reporting of US Coal Reserves report was released on October 30 with the startling opinion that the coal industry has been basing its perspectives on the resource’s future on data that may be skewed, or at least, not telling the whole story. “The belief that the US has a 200-year supply of coal is based on the faulty reporting by the Energy Information Administration of US coal deposits as ‘reserves’,” the report’s authors said. 28
“Most US coal is buried too deeply to be mined at a proﬁt and should not be categorised as reserves, but rather as ‘resources’.” The CEA claims that the 200 billion tons of coal “reserves”, as the EIA has classiﬁed them, are not likely to be extracted economically. The percentage of that total the group feels is recoverable? Less than 20%. “Given the current ﬁnancial strains affecting US coal companies, it is unclear whether they will be able to support the increased capital and labor costs associated with mining coal that is more difﬁcult to access,” the report goes on to say. The report also examined the ratepayer side of its argument, pointing out that consumers were already “paying the price” for the rising costs of domestic coal. Those costs will only go up even more, the authors surmised. “The cost of coal used by electric
utilities has been rising in almost all states at a rate of 6-10% per year, or two to three times faster than inﬂation over the last decade,” CEA researchers said. “Since 2004, average US delivered coal costs have increased at a rate above 7% per year. “At a rate of more than 7% per year, coal costs will double in less than a decade.” Many states have already seen that occur since 2004, the researchers said. The 12 states with the highest annual increases in the cost of delivered coal between 2004 and 2012 were, from highest to lowest, Mississippi (12.54%), Montana (11.64%), Nebraska (11.17%), Indiana (10.03%), Michigan (9.92%), Louisiana (9.68%), Maryland (9.59%), South Carolina (9.58%), Wisconsin (9.34%), New York (9.22%), Missouri (9.2%) and Pennsylvania (9.05%). Interestingly, many of the states on the list have been hit hard with the
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY DONNA SCHMIDT OF COAL USA
Swiss mountains with snow and the clouds being lower than the peaks.
closures of coal-ﬁred power facilities over the past 18-24 months amid the pressure of more stringent federal regulations. Additionally, more than a couple of the aforementioned states are considered among the nation’s top 10 in terms of coal production. So what of the group’s claims that the industry and nation are beyond “peak coal” and that our heyday passed some ﬁve years ago? Though it did not specify what sources it used for its data, the CEA said the proof there was also in the numbers. “Almost all of the top 16 coalproducing states appear to be past peak,” the authors said. “Even the large coal-producing western states of Wyoming – a 14.2% drop – and Montana – an 18.1% drop – have seen signiﬁcant production declines in recent years that aren’t likely to be recouped.” Also seeing falls, from the highest to lowest percentage declines, were 14 other coal heavy-hitters including Pennsylvania (80.2%), Virginia (61.4%), Ohio (50.2%), Kentucky (47.7%), Illinois (46.4%), Arizona (44%), Utah (39.3%), Alabama (32.4%), West Virginia (31.8%), Colorado (28.3%), New Mexico (24.3%), Texas (20.8%), North Dakota (14.9%) and Indiana (2.4%). Alarmed yet? The CEA says we should be. In its recommendations, the report’s authors said decision-makers throughout coal should begin taking a hard look at costs, supply issues for coal and also examining the geology
and ﬁnance of its points. Additionally, those individuals should begin thinking about scenarios that include moving the nation beyond coal “in signiﬁcantly less than 20 years”. “In short, the EIA’s reporting of more than 200 billion tons of ‘estimated recoverable reserves’ for US coal supplies has been like a ‘faulty fuel gauge’ for US coal estimates,” it concluded. Author Leslie Glustrom, who serves as the group’s director of research and policy, shortened that estimate even further to as little as a decade. “Economically viable coal is a non-renewable resource and after examining currently available geological and ﬁnancial data, there is good reason to believe we are rapidly reaching the end of US coal deposits that can be mined at a proﬁt,” she said. “If coal can’t be mined at a proﬁt, not much of it will be mined. It is unclear how long the US coal industry will produce large quantities of coal and at what price but the current ﬁnancial distress of US coal mining companies could lead to signiﬁcant changes in US coal production in less than a decade.” The report also has the backing of the Institute for Energy Economics and Financial Analysis, with the group’s ﬁnance director Tom Sanzillo calling rising production costs the big “sleeper issue” for the coal and energy market masses. “It is a geological certainty and an
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
economic fact that as mining activity matures in a region, production typically becomes more difﬁcult and more expensive [and] the country is going through a transition in its energy mix for electricity,” he said. “What will emerge is a more diversiﬁed set of suppliers for the nation’s electricity consumers. Coal’s relative monopoly at 50% of market share is likely to be replaced by growth in renewable resources, efﬁciency, natural gas and in some regions of the country by hydro ... the coal industry will be smaller with less producers, fewer mines and higher prices.” Geologist and CEA assistant director of research Dr Zane Selvans said coal’s days were likely numbered due to questions of economic supply. “The fundamental constraint on coal is not from natural gas prices or government regulations but from the geology of coal,” he concluded in the report. “The fundamental fact is that most of the coal in the US is buried too deeply to be accessed easily and we are rapidly approaching the end of accessible US coal deposits that can be mined proﬁtably.” He noted the potential short life expectancy for coal was independent of arguments about climate change and clean coal. “Even if coal were perfectly clean – or could be made to be so – it would still be the wrong choice due to serious questions about long-term US coal supplies,” he said. 29
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IN THE DARK Surging energy demands in southern Africa and discoveries off the east coast have led to a feeding frenzy, but what lies ahead for explorers and majors who have invested so much there?
Company Profiles Kinetiko Energy Magnum Gas & Power Real Energy Cott Oil & Gas
ALSO: Taking Stock
African hydrocarbons just keep heating up Kinetiko Energy spuds at its South African CBM Amersfoort project.
Fortune favours the brave
Words by Anthony barich
gas goliath? African Ambush or
Overzealous southern and east African nations have the world on their doorstep, flooding them with investment – but they may have bitten off more than they can chew. South Africa, meanwhile, poses an especially intriguing question: can hydrocarbons rescue the country’s risk perception?
Cape Town’s suburbs facing Table Mountain. Photo courtesy of Vivek Chugh 32
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
t says a lot that at Africa Oil Week in Cape Town in November – the best place to get the pulse of the industry in Africa – the hype had shifted from northern Africa to southern and east Africa. The deeply troubled economies of Mauritania, Libya, Niger, Chad and Sudan and the spread of militant Islam across the north, along with staggering gas discoveries offshore east Africa, has shifted the balance and the focus to east and southern Africa. However, myriad hurdles abound. Companies across the board from multinationals to juniors have expressed grave fears about the nationalistic trends emerging in countries in which they have spent many millions. South Africa remains the biggest country by economic size – and it remains a resource-based economy, with Johannesburg built by gold mining. But its mining industry is arguably in decline, with labour relations still in the news and a bureaucracy many say is corrupt, along with an uncertain regulatory environment keeping investors at arm’s length. Then in 2010 and 2011 a potential 500 trillion cubic feet of gas was identified across Mozambique and South Africa, along with 11 billion barrels of oil in Namibia and a feeding frenzy ensued, with supermajors flooding in. A few AIM and Australian Securities Exchange-listed juniors JANUARY/FEBRUARY 2014 RESOURCESTOCKS
even got some prime space and are benefiting from the investor excitement. Even before that, significant quantities of oil were discovered in Uganda in 2006, which ushered in an investment bonanza, followed by discoveries in Kenya. Offshore, world-class discoveries in gas in Tanzania and Mozambique over the past two years have put every offshore basin across east Africa under the microscope of world oil companies. Today, Royal Dutch Shell, a joint venture between Chevron and Falcon Oil and Gas, Norway’s Statoil SA, South Africa’s Sasol, Chesapeake Energy and, more recently, France’s Total SA partnered with Canadian Natural Resources are all exploring in South Africa for hydrocarbons. The east Africa discoveries have woken up investors to South Africa and have been hailed as having the potential to transform the southerneastern Africa region. But, as often happens when countries realise the world is knocking down their door, they start getting opportunistic. Of course, as in Australia, the local population has every right to expect some share of the riches derived from their own country. The trick is getting the balance right – and when, as has been claimed, more hydrocarbons have been discovered in east Africa in the last two years alone than anywhere else in the world, the struggle to ground
one’s self is an ongoing struggle. The implications of protests at Tullow Oil’s drill sites in Turkana, Kenya around local demands for jobs, which prompted staff evacuations late last year, would have been much further reaching than simple labour relations. Duncan Clarke, the Johannesburgbased chairman of oil consultancy Global Pacific & Partners, which sponsored the Africa Oil Week conference, said that aside from inevitable costs of drilling stoppages and maintenance, it could lead to delays in commercialisation of discoveries made and would add to already emerging concerns in Kenya about tougher terms and state regulatory involvement. “Government should be at least ensuring that local conditions and polities respect the in-place exploration contracts and ongoing operations of licensees,” Clarke said. Deloitte Tanzania partner Bill Page told RESOURCESTOCKS that there was also a pervasive sentiment in Tanzania – “and it’s the same in Kenya and Mozambique” – that the whole world was going to be at the door. So the fiscal terms were much tougher at the recent launch of the licensing round in Tanzania. Tenement packages cost about $US750,000 and they’re charging $3 million-plus for the data that goes with the package – that’s per individual block. “So if you want more than one block, or even if you just want 33
to gain a good understanding of the geology from the seismic that’s been shot around the block that you’re interested in, then you’re going to have to part with a serious chunk of change,” he said. “The government seems to be very bullish that lots of people are going to come and bid – but at the same time I think there’s some scepticism among the companies about whether they’re being too optimistic, because in Tanzania they’re still 2-3 years
tax on areas affecting the upstream industry. Page says his team has had “signiﬁcant debates” with the Kenya Revenue Authority on how those rules would work, while at the same time engaging the government, telling them that “this is really going to cause a problem because deal activity will slow down, there will be fewer deals and the deals will be smaller”. “So they won’t be raising huge amounts of revenue from this,” he said.
“Between international and South African banks, there has been $3 billion worth of ﬁnancial commitment into renewables. That shows the South African energy projects are ﬁnanceable.” ANDREW LEIBOVITCH SUNBIRD ENERGY
away from ﬁnal investment decision on the gas ﬁelds that have been found already. They’re quite promising but at the same time they’re going to be very expensive to develop and the ﬁscal terms, even in the current blocks, are fairly tough.” Mozambique is going down a similar path, with the planned introduction of legislation that will tighten up some of the ﬁscal terms. There is a package of tax rules around the upstream activity that doesn’t affect the existing contracts but for the potential new contracts, it will impose signiﬁcantly tougher ﬁscal terms. Kenya has introduced a withholding
“So as it stands at the moment it’s an inhibitor of exploration, which has a host of unintended consequences – it doesn’t generate much more tax but you do stop economic activity and that’s the risk the Kenyan authorities are running at the moment.”
SOUTH AFRICAN SLIDER
South Africa, like countries across the region, is energy-starved and the hydrocarbon bonanza across east and southern Africa is seen as a solution to the problem. But for South Africa the issue is intensiﬁed due to its mature mining industry. Several planned and unplanned reﬁnery shutdowns, combined with
problems with the single buoy mooring facility off Durban, caused widespread fuel shortages in January 2012. South Africa’s state-owned electricity utility Eskom depends on expensive and environmentally unfriendly diesel generation to cover peak demand and opened two open cycle gas turbines running on gasiﬁed diesel in August 2012. Southern Africa has plenty of coal, its primary energy source that provides 85% of Eskom’s power generation. This will keep it going for some time but South Africa is looking everywhere – LNG from those big east Africa deposits, renewable energy and indigenous gas as feed. The importance of updating and upgrading the southern African energy equation is clearly recognised by governments around the globe. In July last year on a trip that included visits to Tanzania and South Africa, US President Barack Obama unveiled a $7 billion “Power Africa” initiative, which aims to double access to electricity in sub-Saharan Africa by adding more than 10,000 megawatts of cleaner, more efﬁcient electricity generation capacity, with domestic gas reserves in Africa suggested as being a critical component of that change. A month later the US Trade and Development Agency showed its hand when it announced it was granting approximately $A800,000 in funding to progress the ﬁeld development plan for the 540 billion cubic feet (2P) Ibhubesi gas project, operated by Australia’s Sunbird Energy. Ibhubesi contains South Africa’s largest undeveloped gas reserves and has been clearly identiﬁed as a company and
CAN’T RAISE A RED CENT ON SOUTH AFRICA MINING? TRY HYDROCARBONS...
Andrew Lambert, Kinetiko Energy
N AUSSIE OIL AND GAS executive has told RESOURCESTOCKS that he can’t think of a single jurisdiction that has a more commercially attractive market and such great government support than the African country he operates in. Andrew Lambert is managing director of ASX-listed Kinetiko Energy, which is developing the Amersfoort coal bed methane project four hours east of Johannesburg - in South Africa. Yes, South Africa. The country that another executive told RESOURCESTOCKS (see feature on page 64) “you can’t raise a red cent on”, at least in the mining space. “With the sheer attractiveness of
the market and government support, I’m hard-pressed to think of a more commercially attractive jurisdiction to be honest … in fact, I can’t,” Lambert told RESOURCESTOCKS. “Where else can you get $US8-10/ GJ at the well head for gas, which is some of the indications that have come out with the government desperate to ﬁll a hole for the declining coal in the energy mix. “They’ve either got to build nuclear, which will cost them a fortune and have major social implications, or look at gas, which is essential as a transition energy source before renewables get a lot more reliable and usable. “There is a lot of good infrastructure in a lot of the areas in South Africa’s north.”
Lambert said that the labour relations issues that have dogged South Africa’s mining industry of late do not apply to oil and gas. “In terms of labour unrest and those sorts of things, it’s a very different resource pool of people, with technical people who are initially expats,” he said. “There is little chance of labour disputes on oil and gas production ﬁelds because you haven’t got 1000 workers working stopes underground. “For mining in South Africa, the big risk is any factions between unions, especially bulk commodities like coal because they employ more people, so they have much more unionised workforces. For onshore oil and gas, your problem isn’t so much labour,
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
country-changing project. Sunbird’s 24% joint venture partner in Ibhubesi is South African national oil company PetroSA and Sunbird is negotiating with gas customers to unlock ﬁnancing and potential partnering to assist with the development of the Ibhubesi offshore gas project. Sunbird executive director Andrew Leibovitch said the South African government’s actions around securing investment for renewables also gave oil and gas companies some conﬁdence. “Between international and South African banks, there has been $3 billion worth of ﬁnancial commitment into renewables. That shows the South African energy projects are ﬁnanceable,” he told RESOURCESTOCKS. However, there is also a clear priority in developing South Africa’s own considerable shale gas in the Karoo Basin (which the US Energy Information Administration estimates to exceed 400 Tcf), offshore conventional gas in the Ibhubesi ﬁeld and coal bed methane (or coal seam gas). “Oil prices are still above average. Gas pricing in Australia and around the world, apart from the US, are at alltime highs or close to it, whether it’s export to China, Korea, Japan, Europe. Oil and gas pricing is still extremely robust,” Leibovitch said. A large pipeline exists from Mozambique into northeastern South Africa but there is no pipeline running across the country to get it to the west coast. There are several proposals, including importing LNG and piping gas from Namibia, which has the
saves money for South Africa, enables us to do an economic project and is far less carbon intensive than burning diesel, so there’s a real drive there to get gas in the system,” he told RESOURCESTOCKS. Sunbird is advancing two key routes to market for Ibhubesi, namely gas supply to Eskom’s Ankerlig power plant, which is burning expensive
So by the end of last year, the energy crisis sank to levels as bad as 2008 when rolling blackouts occurred. So there are plenty of drivers to get its gas developed. It all seemed so enticing. Could South Africa’s oil and gas industry develop without the stigma attached to its mining industry? Numerous beneﬁts ﬂowed from this, foremost being arresting the
it’s dealing with landowners and any environmental concerns including water. But I’d rather be working with landowners who can be motivated for a win-win than with unions that are ﬁghting amongst themselves and battling for votes. “That is a worry – rival unions trying to drive the membership up.” On claims of corruption among South Africa’s bureaucracy, the country certainly isn’t alone. In some countries, it’s the way to do business. The key, Lambert said, is how to steer clear of it, or face strict punishment from Australia. This comes down to good timing and partners, and seasoned, experienced management and board, so you choose your opportunities. With the UK having gone the way of anti-bribery clauses like in the US,
there has been some press in Australia of late that if it adopted similar strict anti-bribery and anti-facilitation policies, there’s a fear that in places like China that you’re not going to be able to do any business, and Australia will miss out. That said, Lambert favours stronger anti-bribery laws to appease any investors looking for sustainability and the right way of doing things, “so similar legislation like in the UK and the US will give Australians more conﬁdence in what we’re doing”. In terms of bureaucracy, Lambert is not alone in comparing South Africa to Australia. “Many people have told us that the red tape in South Africa is less than Western Australia,” he said. “We’ve achieved more through the various bureaucracies than we
might have otherwise done here, and that’s just through holding their hands, working collaboratively with them and explaining what unconventional gas is. “Otherwise, what they don’t know they’ll fear. A lot of time on the ground does that. Nothing else beats it – making them part of the story.” Having attended Africa Oil Week (see main cover story), Lambert believes that, “without a doubt, people are looking at onshore sub-Saharan Africa. You can see all the hub of activity across the East African Rift, while offshore there is still a lot of exploration being done by the big boys”. “Southern Africa is now seen as early frontier. People that get in there ﬁrst have the highest risk proﬁle, but also have the highest potential,” he said.
offshore Kudu gas ﬁeld in the Orange sub-basin. Kudu has been undeveloped since Chevron Texaco discovered it in 1974. Since then it has been owned by Royal Dutch Shell and Energy Africa. Tullow Oil bought into the ﬁeld when it bought Energy Africa in 2004. They’re in the process of getting that project up but Namibia doesn’t have much of a market – while South Africa does. But the logistics of getting it onshore in Namibia then getting an agreement with South Africa to supply gas are quite difﬁcult, especially when South Africa is looking at Ibhubesi and would see it as a favourable and easier option. Leibovitch said the fact that South Africa was even investigating LNG options demonstrated the high-value energy market. “They’re currently paying $22 to $25-plus per gigajoule for their diesel fuel peaking, while somewhere between $12-15/GJ for a gas price
imported diesel and the South African Department of Energy’s Independent power plant tender for a 474-megawatt gas-ﬁred facility. Sunbird also has CBM prospects, recently independently certifying a 2C contingent resource of 644Bcf and 3C contingent resource of 1018Bcf at its Mopane project, with initial pilot production planned for 2014. In late November last year, Eskom declared an emergency and requested major industrial users to cut consumption. With supply at 31,000MW, the power reserves margin was less than 1% – most developed nations maintain a reserve of more than 15%. Eskom had to use its open cycle gas turbines (all ﬁred on diesel – like the Ankerlig plant in Cape Town, south of Sunbird’s project – to support the network for longer periods than usual and this has now affected diesel supply for the turbines.
“South Africa’s claim for the right to further acquire extra production assets will prove doubly onerous and risk-ridden.” DUNCAN CLARKE GLOBAL PACIFIC & PARTNERS
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
country’s 25.6% unemployment rate. Leibovitch said Sunbird’s Ibhubesi project, for example, was technically and economically viable and was “in the national interest to develop”. “It develops signiﬁcant energy infrastructure for South Africa, creates many jobs and downstream industries, delivers a huge amount of national beneﬁt in terms of government take and royalties, reduces their current import bill and we’re looking at pricing it in Rand with no linkage to international oil prices,” he said. “If you have LNG, or even diesel, it’s priced on the oil price and in US dollars. We can do just a predominantly Rand-based price, which removes a huge amount of commodity and foreign exchange risk for South Africa. So there is huge beneﬁt in developing local gas. “Generating power from Ibhubesi gas will increase energy security, replacing expensive imported fuel, provide critical mid-merit and peaking power and offset the large transmission losses from the grid. Ibhubesi will also provide substantial revenues to the South African government through income taxes and royalties on the sale of oil and gas.
“Moreover, beyond this capital impost, the claim for the right to further acquire extra production assets – beyond this level, on to-benominated ‘market-related’ terms – will prove doubly onerous and risk-ridden, given the evident and presumptively deliberate ambiguity that this sleight-of-hand implies,” he added. He said the manoeuvres would SHOCKWAVES particularly affect the likelihood of In October 2013, South African majors coming into offshore South Mineral Resources Minister Susan Africa to undertake the high-risk, Shabangu sent shockwaves through the very expensive offshore exploration industry by revealing the government’s and would cause those already there plans to take a 20% free-carried stake to rethink their continuity of forward in all new oil and gas ventures and investments. reserve the right to buy a further 30% “These measures, whether put into at market-related rates. law or regulations, would amount Exxon Mobil and Royal Dutch Shell to a kiss of death for the country’s immediately protested the draft law’s upstream oil and gas future at a time failure to specify what size must be when its structural vulnerability is ceded, warning that the uncertainty substantial and growing,” he said. would deter investment. This was especially the case, he Clarke said that as a mandated added, given that the same bill sought requirement without any payment to abolish the Petroleum Agency SA, made for past exploration, discovered the independent licensing authority reserves or to meet development and/ that over the past dozen years had or production costs, it amounted to worked to secure the conﬁdence of de facto nationalisation without due the global industry in South Africa’s compensation. “still-frontier potential”. “The difference with energy projects is that they are nation-building projects in that they support the economy and development. Diamond, iron ore, platinum and gold mining doesn’t drive a mining economy. Energy drives broader economic growth with energy security from indigenous local gas and enables service industries and industries downstream of oil and gas to develop.”
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south africa junior steps on the gas With every drillhole hitting gas, South Africa-based Australian junior Kinetiko Energy is revved up to enjoy first mover advantage in a potential frontier onshore gas field. Ngaire McDiarmid reports
inetiko Energy is in pole position to work on meeting an increasing demand for gas in energyhungry South Africa. The company has successfully hit gas in all 29 of its exploratory drillholes and the gas is so easy to process, it is already fuelling the fledgling company’s car. “We power our site vehicle using compressed natural gas and plan to power headquarters using gas produced,” managing director Andy Lambert explained. “Gas in sandstone can be produced very quickly, it doesn’t need dewatering and the economics are very, very attractive.” Kinetiko (49%) has a hybrid play at its Amersfoort joint venture project with Badimo Gas (51%), about 250km east-southeast of Johannesburg. Not only has Kinetiko struck coal bed methane, it has also found gas in sandstone above and below the coals, which means very low-cost development of potentially about $A200,000 per well. “It’s a shallow field, which means quick payback,” Lambert said. “There are no fraccing costs, low water requirements and low costs in country and although production per well will probably taper off within 15 years, it’s economically very attractive because we don’t have to spend a fortune on it.” Independent consultants Gustavson Associates calculated Kinetiko’s P50 contingent resource at 1.5 trillion cubic feet and total gas in place of 2.4Tcf, with a further 4.4Tcf of prospective GIP at Kinetiko’s technical cooperation permits. Having hit the drilling jackpot, Kinetiko is undertaking a technical
review to be completed in the first quarter of 2014. “Every one of the 29 coreholes has encountered gas,” Lambert said. “The gas is there, the question is: is it commercial?” Kinetiko also has a huge potential exploration footprint in South Africa of up to 19,000sq.km. “We are the largest onshore CBM exploration company in South Africa and as a result of the size of acreage onshore, we’re the first mover in a new frontier where there’s a desperate need for energy,” Lambert said. Although it’s referred to as a new frontier, Amersfoort has plenty of infrastructure Kinetiko can tap into, including the power grid or existing gas pipelines that run through its tenements and the fact Johannesburg is less than 300km away. The Amersfoort project spans about 1601sq.km, then Kinetiko has more than 10,000sq.km subject to exploration rights or TCPS, coupled with its memorancum of understanding with Badimo for a further 7086sq.km of applications. The JV relationship was strengthened in 2013 and Kinetiko continues to operate Amersfoort for its 51% South African partner. All the pieces are falling into place and Kinetiko is set to hit top gear this year, starting with the comprehensive technical review and continued strategic negotiations. “We are seeking customer offtake agreements and maiden reserves midyear,” Lambert said. “So we’re on the path to obtaining those and they are significant milestones – and that’s just on the Amersfoort project. “Then we’ve got all these other areas we’re set to develop.
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“Done correctly and with a bit of luck in the geology, we could well be in a brand new gas frontier in South Africa. “We’re very excited about it.” Kinetiko is also enjoying support from different quarters. The company was recently buoyed by a positive research report released by Argonaut in November 2013, putting a buy rating on it with a target price of 48c.
Kinetiko Energy spuds at its South African CBM Amersfoort project.
“We are the largest onshore CBM exploration company in South Africa ... we’re the first mover in a new frontier where there’s a desperate need for energy.” The report said Kinetiko’s progress to date was highly encouraging and it noted substantial upside existed to Argonaut’s valuation. Lambert said the South African government was also proving supportive. “South Africa has awakened to their domestic energy needs, there are increasing rolling blackouts and the state’s power supplier is under enormous pressure to find new energy sources without having to import and upset the trade balance,” he said. “It’s a supportive environment and peers tell me that we’ve achieved more in two years of operation there than we could in Western Australia. “I think that’s a litmus test, plus we’ve done it at a fraction of the cost because of the low cost of labour, equipment, and skills – and the asset is not very complex, it’s pretty simple to extract the gas.” In addition, Kinetiko and Badimo have been working hard to shore up support from the numerous landholders associated with their exploration. “Onshore coal bed methane is a function of a large number of wells so we’ve got a very big landowner involvement,” Lambert said. “We have town hall meetings and we explain that we’re a small company but that they are talking to the key people. “We’re the people behind it and we want to do it the right way, create jobs out of it and the best thing is, it has little impact on the land or water.” He said traditional CBM operators had to dewater coal for long periods of time before the gas was released but as Amersfoort’s CBM was associated with gas in sandstone in relatively shallow areas, it could be accessed immediately and required 38
comparatively little water for processing. Kinetiko has a wealth of commercialisation and downstream options at its feet. “We could build a pipeline or transport compressed gas or LNG, or the easy option is to convert it to electrons onsite and put into the grid that runs through the tenements,” Lambert said. “Or we could put it into the existing pipeline that runs all the way to Richards Bay or Durban.” Kinetiko is shifting up a gear to establish its maiden reserve and investing in upskilling local drillers and engineers with a view to move into field production within two years. “We hope to be able to drill another 50 wells in the next 18 months – and that’s a conservative number,” Lambert said. “That’s subject to having the skills and funding to be able to do it and that basically sets us up to be a production field. “We’ve got the scale, the track record of successful exploration over the last two years and there is a high domestic demand for gas and high gas prices. “When you couple that with the low costs of exploration and operation and new frontier status, you can see we’re poised for growth.” Lambert said the timing was perfect for Kinetiko to surge cross the starting line to supply South Africa’s growing energy needs. “Last century was the century of oil, the previous one was coal and the next century may well be renewables once we get the cost down,” he said. “But this is the century of gas. “And we’re ready for the next exciting period for Kinetiko and our partner to begin.”
Kinetiko Energy spuds at its South African CBM Amersfoort project.
andrew lambert kinetiko energy
kinetiko energy at a glance
Head Office 283 Rokeby Rd Subiaco WA 6008 Australia Ph: +61 8 6315 3500 Fax: +61 8 9481 1947 Email: firstname.lastname@example.org Web: www.kinetiko.com.au Directors Adam Sierakowski, Andrew Lambert, Dr Donald Searle, Agapitos Michael Market Capitalisation $A22.2 million (at press time) Quoted shares on issue 139 million Major Shareholders Christina Michael 16.76% Earthsciences 8.23% Blue Saint 5.88% BNP Paribas Nominees 4.78% Ekul Nominees 3.13% JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY ANTHONY BARICH
DIAMONDS AREN’T FOREVER, ENERGY IS As in surrounding countries, Botswana is facing a serious energy issue. But it also needs the investment for the future of the economy, with its renowned traditional diamond-led economy facing a finite future.
T TURNS OUT DIAMONDS aren’t forever. With surrounding nations Mozambique, Kenya, Tanzania and South Africa proposing or imposing terms for hydrocarbon investments that have left foreign investors bafﬂed, Botswana appears to be a picture of sanity. Now, however, Botswana has realised some assumptions it made about energy sources have been wrong and urgent action is needed. But its approvals processes are far too long. Magnum Gas & Power is developing two coal bed methane projects across two early-stage basins that are also under exploration by majors including Exxaro, Origin Energy and Sasol. Managing director Trent Wheeler said it took six years to achieve what should have taken two. “They were reliant on South Africa, they thought everything was covered for power [but] they weren’t,” said Wheeler, whose company is involved with the Botswana Resource Sector Conference in Gaborone from June 10-11. “Then they thought these large coal projects would come onstream and fulﬁl all their needs and they haven’t, or are just coming online now. But they only meet baseload, whereas gas suits mid-merit peak and it has a cleaner carbon footprint too. “[Botswana’s] departments and the ministry are very proactive, strategic and forward-looking. Their hearts are in the right place wanting to do the right thing but, to be blunt, we’ve found they’d rather not make a decision than make the wrong decision. So things can take a lot of time, which our market here [in Australia] is not used to.” Wheeler has worked on the North West Shelf, Bass Strait, Gulf of Thailand, Gulf of Mexico and onshore Canada. He said that when his team ﬁrst arrived in Botswana to scope out projects six years ago, it was very
similar to Western Australia’s north but has come a long way since then. “We found the country to be similar to here, it’s like working up north of WA, so it’s like a ﬂy-in, ﬂy-out operation for us,” he said. “There were similar issues with land, services, logistics, access, implementation – except it was like stepping back in time into what was needed in processes, paperwork and facilities. “In Botswana itself though, we’ve found there is not that ability or expectation of corruption like in other areas of Africa. We’ve been able to do absolutely everything above the table.” Capital Resources’ Botswana Country Review 2013/14 noted that the country fared reasonably well in the World Bank survey of “Doing Business”. Capital Resources said that relative to other countries, Botswana did well on measures related to ﬂexibility of employment legislation, getting credit, closing a business, protecting investors, registering property and paying taxes, although it did less well on starting a new business, dealing with licences, trading across borders and enforcing contracts. Wheeler’s observations on the ground in Botswana reveal that the country’s economic growth on the back of diamonds has been re-injected into the community by way of infrastructure, medical and education needs. It means Magnum is often sitting with people who have studied internationally and returned to their country with 1-2 degrees, which leads to a willing and educated workforce. “You’ve now got a growing educated workforce that’s looking for employment and it’s not necessarily growing at the same rate,” Wheeler said. “That’s why I see what we’re doing here as being strategically very important for us and the country – it gives them their own domestic sovereign power generation for their
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own security needs and it’s a trigger for all the other industries around it – not just for technology transfer where we’re bringing in other supporting industry and services like drilling rigs. “If we can provide gas, we can compress it so it’s transportable and usable in compressed natural gas, we can go to liquids in the form of diesel and also methanes as feedstock for ammonium nitrate, which is used for fertiliser and explosives for the mining industry in the region.” The country was also easy to access, he added, without the landholder density issues that CSG companies found in eastern Australia especially. “We’re under basalt layers, we don’t interact with water aquifers, we don’t affect the stock water, so we don’t have issues we have in Australia,” Wheeler said of his Botswana plays. “They’re desperate for water so if we can bring that to surface it’s slightly saline but is good quality, you can treat it and it’s a good by-product, rather than being a disposal issue. “So you’re able to stimulate aquaculture and agriculture, making it potable for industry, so you’re supporting the immediate industry and services that develop it but a whole lot of local capability around it. So it’s a big trigger for the whole country.” Critically, Wheeler said, Botswana only had about another three decades of diamonds left, so it knows it needs to build other capabilities to sustain the growth. “Diamonds aren’t forever,” he said. “But energy is so fundamental. “We don’t have gas pipelines criss-crossing the country. It’s not like the US where they can just plug into a pipeline, so we need to be more vertically integrated – we need to facilitate our offtakes to show that it’s commercial and get those bankable feasibility studies away.” 39
magnum gas & power
magnum tAKES AIM AT botswana’s overhaul Perth-based MPE is poised to help trigger the game-changer that Botswana needs to become a major hub and net exporter into Africa’s energy-hungry southern region – with multiple downstream options to boot. Anthony Barich reports
ame changer” is an over-used word in the resources sector, but when you’re talking about a foreign investment-friendly jurisdiction in Botswana whose economy is facing nothing short of an overhaul in the coming decades, Magnum Gas & Power’s projects fit the bill. With three decades left of the diamond trade that has underpinned the richest non-oil producing African economy thus far, the basin where Magnum’s projects are strategically located have the very real potential to trigger a flurry of downstream industries to continue Botswana’s prosperity. Importantly, MPE’s coal bed methane (CBM) acreage across its two project areas is 100% owned. Although the blocks may look small on the map, they are substantial and any one of them could well be a company-maker, while the potential
Magnum Gas & Power’s drill crew in Botswana.
gas resource could justify multiple downstream projects to benefit Botswana in a myriad of ways. Botswana has relied for too long on energy from South Africa which, struggling with its own rolling blackouts and power-generation issues, has turned the taps down of late. There is plenty of local demand, and growing, as Botswana continues its rural electrification program, but it needs cheaper energy than the diesel it’s currently paying approximately $US25/GJ for to power 160MW of power generation. While recent expansion of coal-fired power helps fulfil some of Botswana power crises, it doesn’t meet mid-merit and peaking needs. CBM gas is a much cleaner and more flexible source of energy. The 90MW Orapa dual-fuel power station just north of Magnum’s CBM acreage powers a nearby diamond mine and is awaiting CBM gas. It currently burns over 30,000 litres of diesel an hour, so the market is ready
and waiting. Certification of gas reserves is the key. At time of writing last December, MPE was focused on exploration work including drilling, core samples, gas measurement and downhole tests. This year it will progress to appraisal, consisting of test production wells where the gas flow rate and profile is determined – ie, how quickly it dewaters and how much gas comes out. This will give a contingent resource, then as it progresses and it’s shown to be commercial by drilling it out further, a reserve can be booked. MPE has six blocks in the prioritised central project area that is in Botswana’s most progressed, de-risked basin, whose coals are analogous to South Africa’s Waterberg Basin. The company’s northern project area is located over coals that are analogous to Zimbabwe’s Hwange coal field, with better gas content and recoverability expected, currently in early exploration stage. The central project area’s top two northern blocks have been drilled and while the results were good enough to undertake an appraisal well, the intention for the first half of 2014 is to drill the two southern blocks, core them and then pick the preferred area “sweet spot” to do appraisal work on and to be subsequently drilled out and proved up for commercialisation. While all this is being done, a joint venture between South African integrated energy and chemical company Sasol and Aussie major Origin Energy have been busy on a major block adjacent to Magnum’s two northern blocks; as has previously coal-focused South African major Exxaro, which has now established a special energy division, such are the needs in the region.
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All this work helps qualify the basin for the government and market and gives MPE future options for joint ventures or offtakes. “Once the basin has reserves, it’s a really big tick for the government and other stakeholders that have been unsure about this basin, because it’s the first (commercial) gas in Botswana. That will really trigger movement in the country,” MPE managing director Trent Wheeler told RESOURCESTOCKS. Houston-based consultancy Netherland, Sewell & Associates, MPE’s certifier since it started in Botswana six years ago, also work for Exxaro and MPE’s fellow Aussie junior Tlou Energy and, importantly, has been working with the Botswana government for its CBM roadmap, so MPE knows that its own strategy is aligned with the government’s. “If we can show continuity between our wells and those of our neighbours - for example, Tlou, because they’re so close - then both companies can hopefully book a larger contingent resource and reserve quicker, gaining a ‘critical mass’ of reserves to expedite proceedings to get the first downstream project away,” Wheeler said. Last year Tlou booked 2.3 trillion cubic feet of contingent gas resource. MPE has estimated recoverable gas in place of 12.6Tcf, based on pre-feasibility studies, core work and test data done by independent unconventional consultancy Advanced Resources International, which has done work in Zimbabwe, Botswana and South Africa, along with CBM basins in the US and round the globe. All MPE’s efforts are driven by key inputs to develop a bankable feasibility study and onto production. While Magnum progresses exploration activities on the ground focused on certification of reserves, it is also working to develop some vertical integration through partnering with potential downstream project partners in order to secure offtakes for the gas. Certified gas reserves and a commercial offtake enable production project financing; three legs of a bankable feasibility study, which is an estimated 18 months away at this point. As MPE proves up its reserves initially, it is planning a small-scale gas-to-wire model which is modular, flexible and can start the basin off. It also has the ability to service a number of markets, including compressed natural gas (CNG) and small to mid-sized gas-to-liquids (GTL) plant producing diesel, of which Botswana uses a lot.
South Africa’s refining capacity has peaked so everything has to be imported, which is harder to get hold of and more expensive, so sovereign diesel generation would help Botswana immensely. As MPE proves up bigger reserves, CBM can be used to feed an ammonium nitrate plant that produces fertiliser and explosives used by the mining industry, both of which are highly demanded in the region. Water produced from CBM as a by-product may also help develop the local agriculture industry. Availability of both water and fertiliser may assist Botswana in developing its own food bowl, such projects are attractive to World Bank and other development funds. There are already agriculture projects in place that could provide a good way to commercialise MPE’s northern blocks. So it’s a trigger for the whole country. Down the track there is also potential for carbon dioxide sequestration which assists enhanced production of methane. However, while there are a number of different markets to commercialise MPE’s projects, gas-to-wire is expected to be the first cab off the rank and it can be grown incrementally as the CBM basin is further proved up. “Botswana is very cognisant that it needs stable power supply in the region which it hasn’t had as it has suffered rolling brown-outs and power supply issues, so if it can get its own power generation for the nation consistently and even grow that potential to become a net exporter and a hub for the southeastern African region, that’s a gamechanger for Botswana,” Wheeler said. “So not only is what we’re providing for the sake of the country, but power and energy is fundamental for a country to grow. It needs that stability for its economy to entice the manufacturing and services industries and other corporates.” Meanwhile, MPE also has substantial coal seam gas projects in New South Wales back in Australia raring to go, with an estimated gas resource of 2.6Tcf in a permits surrounded by major players including Dart Energy and Santos. It is well known that NSW is facing critical gas shortages, with some 95% currently supplied from interstate, mainly South Australia’s Cooper Basin. A demanding market means the project is simply waiting for the political environment to improve. But when it does, another substantial player will be active in the Australian market.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“Not only is what we’re providing for the sake of Botswana, but power and energy is fundamental for a country to grow.” trent wheeler magnum gas & power
magnum gas & power at a glance
Head Office 78 Churchill Avenue Subiaco 6008 WA Australia Ph: +61 8 9380 6755 Fax: +61 8 9380 4026 Email: email@example.com Web: www.magnumgpl.com Directors Tom Fontaine, Trent Wheeler, Raalin Wheeler, Brett Montgomery Market Capitalisation $A7.3 million (at press time) Quoted shares on issue 806.4 million Major Shareholders Avatar Energy Pty Ltd 9.49% Raalin Wheeler 7.48% Trent Wheeler 7.48% David John Newman 6.05% Benny Ben Otim 5.76% 41
real potential springs up in cooper basin The numbers more than add up for brand new Australian oil and gas explorer Real Energy – indicating that a potential major has just entered the Cooper Basin. Ngaire McDiarmid reports
Real Energy’s gas potential eclipses the Cooper Basin’s total production to date.
eal Energy debuted on the Australian stock exchange in December with a wealth of positives: experienced management, the right location and three major plays in its sizeable 100%-held acreage. And it is the enormous gas potential within this acreage – that could eclipse the Cooper Basin’s total gas production to date – that has co-founder and managing director Scott Brown excited. The company holds more than 2 million acres in Queensland’s highly productive Cooper-Eromanga basins, which have 160 gas fields and 80 oil fields in production. So far, the Cooper has produced 6 trillion cubic feet of gas but this figure is eclipsed by the potential at just one of Real Energy’s three plays. An independent geologist has assessed that Real Energy is looking at 10.2Tcf from its basin-centred gas, not
to mention 18.5 billion barrels of oil from its shale oil potential. “In our permits we have potentially more gas than has been produced to date from the whole of the Cooper,” Brown told RESOURCESTOCKS. “These are massive numbers.” Of Real Energy’s three plays, its first priority is the large, unconventional basin-centred gascondensate play in the Permian Toolachee and Patchawarra formations, understood to be a continuous gas play within two of Real Energy’s permits. Brown said it was low risk with high material upside. The company’s second priority is the conventional oil and gas targets within its permits, with a best estimate of prospective resources of 21 million barrels. The oil in the Eromanga Basin offers the most likely potential for early production and cash flow. The third play is by no means the least – it is the unconventional shale oil resource within all permits in the Cretaceous Toolebuc shale that has the potential 18.5Bbbl of oil. The company is an early mover in the emerging Toolebuc shale play and Brown believes this will provide yet another competitive advantage to the emerging explorer. He said Real Energy was in a great location, with operators including Chevron, Beach and Santos in the area. “There are several good companies that have all had good discoveries here,” Brown said. “In the block next to our 927 permit, Santos has made another gas discovery targeting the same sort of formations we’re targeting. Significantly it was a vertical well without any fraccing [hydraulic fracturing or stimulation].
“All the wells that have been drilled around the 927 block have all had gas in the Permian section – Toolachee and Patchawarra formations – which is gascharged throughout, in this particular area.” Brown said Real Energy liked the Cooper Basin due to the availability of infrastructure, the number of pipelines in the area, rig capacity and access to experienced operating service companies. In fact it is testament to the managerial expertise of the company that it obtained such prospective land among strong competition. “There are no juniors that have 2 million acres and still own 100% of their projects in the area,” Brown said. “Most of the companies that have got big acreage and are those with much larger market capitalisation like Santos, Beach Energy, Senex and Drillsearch.” He put Real Energy’s competitive advantage down to its technical and management team, starting with cofounder and director Lan Nguyen. “He’s one of the best petroleum engineers and geologists in the country, particularly for basin-centred gas plays,” Brown said. Experienced industry executive Norman Zillman, who was a founder and CEO of Queensland Gas Company, is also on the board as a director. “It’s great to have access to his experience around the board table,” Brown said. Real Energy also recently appointed US-based fund manager Michael Mager to the board to link the company to overseas investment markets. “He’s energetic and well-connected and we think he will be able to help us grow the company,” Brown said.
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“In our permits we have potentially more gas than has been produced to date from the whole of the Cooper.” scott brown real energy
He also made mention of Real Energy exploration manager Dr Terry Russell who has 30 years of experience in the industry and has operated and drilled a number of wells in the Cooper Basin. Brown believes Real Energy is poised to benefit from an unconventional gas evolution. “We’ve got very big resources and we’re probably considered an unconventional play, even though we have some conventional potential within our acreage,” he said. “But it’s the unconventional – the shale and the continuous basin-centred gas – that has got enormous upside.” He said North America’s level of unconventional gas production had gone from a low percentage to the dominant force. “The US is now self-sufficient in natural gas production and that’s happened in a decade,” Brown said. “That evolution is going to happen in Australia and the place that’s going to happen is the Cooper, because you’ve got strong geological knowledge and strong infrastructure already in place. “You’ve also got factors like the LNG facilities being built at Gladstone that will be very hungry for gas and while production from coal seam gas will increase, they’ll need to
supplement the gas demand with shale gas and unconventional gas from the Cooper.” Brown is quietly confident about the drilling planned for the basin-centred gas play, which is anticipated in the second quarter of 2014. “We’ll have some good results we hope at that time,” he said. “We’re reasonably confident these will be vertical wells, we’ve got good seismic coverage of the areas we’re going to drill and we’re quietly confident that we’ll get a good result.” He expects the three wells to be proof of concept and on the back of good results, will then plan a bigger drilling program for 2015. “I think we’ll find that we’ll be very attractive once we prove up significant gas,” Brown said. “The wells really are proof of concept and because we’ve got a very big area, there’s enormous upside for us.” With such potential, Brown describes Real Energy’s development as exploitation rather than exploration. It is little wonder the company’s initial public offering was oversubscribed. Brown says the company represents extraordinary value and investors look set to be rewarded as the huge upside is explored.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Real Energy’s permits are surrounded by infrastructure and other major companies.
real energy at a glance
Head Office Level 3, 32 Walker St North Sydney NSW 2060 Australia Ph: +61 2 9955 4008 Fax: +61 2 9954 6408 Email: firstname.lastname@example.org Web: www.realenergy.com.au Directors Scott Brown, Lan Nguyen, Norman Zillman, Michael Mager Market Capitalisation $A32.6 million (at press time) Quoted shares on issue 167.4 million Major Shareholders Och Ziff 15.77% Scott Brown 15.4% Lan Nguyen 12.25% Sino Portfolio 10.3% 43
WORDS BY PETER STRACHAN
Tangiers Petroleumâ€™s takeover of Jacka Petroleum could create a substantial new African player.
IN THE MAKING? Taking Stock looks at the macro forces behind market movements, as well as global trends that impact the resources industry.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“Jacka has backed itself into a corner.” PETER STRACHAN INDEPENDENT ANALYST AND AUTHOR OF www.stockanalysis.com.au
N A MOVE THAT WILL create a signiﬁcant new Africanfocused company, Tangiers Petroleum (ASX:TPT) has agreed to merge with Jacka Petroleum (ASX:JKA) via an agreed bid. Tangiers is paying 0.468 of a share for each Jacka share. Jacka has backed itself into a corner. After struggling to fund a massive cost overrun on the Hammamet West appraisal well, Jacka was left with little ﬁnancial ﬂexibility to fund its work and little chance of raising funds with a share price hovering around 7c. Tangiers has access to cash and an ability to fund the new group’s ongoing work, while Jacka adds operational management to the deal that will strengthen the Tangiers board and management. During the bid process, entrance via Jacka at a share price of 9c offered a 15% discount to the market price of Tangiers, so those who liked the deal had plenty of opportunity to get set. The merged Tangiers group combines a strong management and board with estimated cash of about $22 million post completion of all farm-out agreements, subject to ﬁnal government approvals. Key assets include Tangiers’ Tarfaya Block offshore Morocco where Portuguese farm-in partner Galp Energia plans to drill a well to test the Trident prospect during H1 2014, subject to ﬁnal Moroccan government approvals. Trident has been estimated to hold potential for 450 million barrels of recoverable oil, if hydrocarbons are present. The group’s 15%-held Hammamet West gas and oil project offshore Tunisia, where recent drilling provided strong evidence for a commercial outcome in the Abiod limestone, will form a signiﬁcant project for the group, adding diversity to the portfolio. Further drilling and testing of the recent Hammamet West-3 well
is planned for mid 2014, with results likely to inspire further drilling, leading to a development decision or less likely, kill the project. Ultimately, Tangiers could monetise the project or farm-down to say a 7% interest for development. A 5% interest in the +200MMboe Aje oilﬁeld offshore Nigeria represents a challenging project, given difﬁcult political, social and ﬁscal conditions in that country. However, an appraisal well is planned for late 2014. The result could add value by reducing technical risk. In Tanzania, the company has 100% interest in a grassroots project where an aerial geophysical survey and a 2D seismic survey are planned for 2014 on its Ruhuhu Block. The company also holds 15% of a permit, onshore northern Somaliland, over sediments that correspond with a productive basin in Yemen. While this merger signiﬁcantly dilutes Tangiers’ upside per share for Morocco, it also provides diversity of opportunity and brings the relatively low-risk Hammamet West appraisal project into the fold, where StockAnalysis estimates that success would support a valuation of at least A25c per share. In order to value the company at this stage of development, StockAnalysis adds $30 million of new equity into the value mix to assist ongoing project development. While the pricing of inevitable new equity is uncertain, StockAnalysis uses 21.4c to be most conservative on dilution, but recognises that an issue is not imminent and is more likely to be timed to coincide with market interest surrounding drilling on the giant Trident target. StockAnalysis estimates that discovery of oil in all three target zones on the Tarfaya project has upside value of over $6 per share, while conﬁrmation of the Hammamet West project potential should be worth 25c per share to Tangiers. Staying with an African theme,
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Pancontinental Petroleum (ASX:PCL) and partners including UK giant BG, have scheduled drilling on the Sunbird prospect during H1, 2014 just 25km off the Kenyan port of Mombasa. Sunbird is a large, well-deﬁned Miocene pinnacle reef structure in an area considered to have high potential for oil. This type of buried reef is often found to be a proliﬁc producer, having high deliverability because of excellent porosity and permeability, but only drilling can tell if hydrocarbons are present at Sunbird. StockAnalysis calculates that this large structure covering 73sq. km has potential to hold recoverable oil reserves of at least 200mmbbls, which would have a value to Pancon’s 18.75% interest of around 39c per share. Pancon is well funded with $33 million of cash and farm-out funding support over this and its EL-37 permit offshore Namibia. Additional farm-in funding is being sought for drilling of the Kifaru prospect with FAR Ltd on L6 to the north of L10A, where Pancon now has 40% post the withdrawal of Apache Energy. Until L6 and L8 in Kenya are farmed-out, little news is expected from those permits but over in Namibia, Pancon’s partner Tullow will be busy collecting 3D seismic data in 2014, ahead of planned drilling in 2015. The Namibian permits hold identiﬁed leads with potential to yield over 7 billion barrels of oil, so 3D data will be used to rank the targets for drilling. StockAnalysis estimates that discovery of 800MMbo in Namibia would have a value for Pancontinental’s retained 30% interest of about $2.49 per share, so there is plenty of leverage to discovery. 45
papua new guinea, australia
cott oil & gas
deal throws junior in with the big boys Cott Oil & Gas has inked a game-changing deal, potentially leading to an LNG project in PNG that ensconces the Aussie junior with the big boys in the region. Anthony Barich reports
Cott Oil & Gas rigging up in PNG.
ott Oil & Gas is officially in the big league, having been awarded a 40% interest in a gas field that adds a whole new dynamic to a region awash with LNG possibilities and a hungry market. Earlier in 2013, Cott put together a syndicate with Kina Petroleum (25%), Talisman Energy (operator, 25%) and Santos (10%) for the new PRL 38 licence over the Pandora gas field, after the previous PRL1 licence expired. Pandora now becomes Cott’s flagship project. Cott initially identified PNG as an extremely prospective area and this award has turned into a gamechanging deal, Cott managing director Andrew Dimsey said. “We believe we can provide some innovation, speed and an aggressive approach, which we think is sometimes missing at the larger end of the market,” he told RESOURCESTOCKS.
“We also have our eye on other projects which we think can be moved ahead at a faster pace as well. “The philosophy behind the Pandora deal is that, although we believe it stacks up as a stand-alone LNG development it could also be combined with the existing Western Province gas volumes that are part of the proposal to build an LNG plant at Daru Island. “Two wells have already been drilled in the Pandora gas fields and production tested at a combined 100million standard cubic feet per day. “At this stage, there are a number of strategies for aggregating new and existing gas to underpin gas export developments and these are approaching a critical mass point now. “There is potential upside in Pandora, in that it is a series of limestone/carbonate structures, of which only two have been drilled thus far. The gas field was historically
reported by Oil Search as a 2C contingent resource of 800 billion cubic feet. We believe that there is potential upside to that, as there are several additional leads which look very strong for discovery.” As part of the process that Cott has put together, the company has a profit-sharing arrangement with Hong Kong-based International Exploration Services Ltd (IES), which has done much of the consulting and background work on the resource and evaluating the possibilities of developing Pandora. Cott effectively cut IES in for a profit share on part of its interest, up to a cap of $1 million a point, based on commercialisation. With all these factors woven into the deal, Dimsey said it was “a pretty exciting permit to be involved in. It adds to our Western Province licenses and prospects and, from a reserve point of view, we think it could play an important role in accelerating the
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“We believe Pandora stacks up as a stand-alone LNG development and could also be combined with the existing Western Province gas volumes that are part of the proposal to build an LNG plant at Daru Island.” andrew dimsey cott oil & gas
cott oil & gas at a glance
development of Western Province gas. Cott has relatively low commitments in the first three years, and its initial focus will be on establishing the commercialisation approach where it can move forward either as a stand-alone or as an aggregation arrangement with other parties”. Pandora’s substantial resource means the economics of mid-scale LNG process can be considered. There are a number of established marine LNG operators who are now building mid-scale floating LNG facilities. London-based shipping company Golar LNG has engaged Keppel Shipyards of Singapore to convert one of its LNG tankers into an FLNG vessel and has options to convert a further two ships. These would all be in the 1-2 Mtpa range, which is suitable for a 1Tcf discovery over a 10-year project life. Hoegh LNG (shipper) and SBM Offshore (FPSO) are also active in this space and are now moving into the development of their own FLNG platforms. “We think it’s an exciting time for FLNG as a number of these LNG midstream players are looking to move upstream by setting up similar financial structure to the old FPSOs,” Dimsey said. “They will toll the LNG through their facilities – Golar has indicated
Cott’s PNG Licenses a liquefaction cost of $3-4/MMbtu – and surrounding and may even look to acquire gas at developments. the wellhead. “This reduces the upfront capital component for the developer significantly. “The FLNG vessel will have a liquefaction plant on board, along with LNG storage capacity and will offload to carriers moored on station.” One of the beauties of the Pandora discovery, he said, is that it’s in only 110m of water and the drilling depth is 1500m so development costs are very manageable. Furthermore, the weather conditions in the Gulf of Papua are fairly benign for all of the year. “So we think it has all the ingredients for an attractive project with a short development lead time and a relatively low capital requirement, particularly with FLNG operators now looking for projects,” he said. This is where market forces are working in Cott’s favour as it develops this project and its other PNG interests. While Pandora is now Cott’s flagship project, the company is keen on extending its footprint in the Western Province too, believing there is huge potential in the region. And the company, in joint venture with Kina Petroleum, has undertaken regional studies to identify the
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
share price as of Jan 8 $0.14 Head Office 945 Wellington Street West Perth WA 6005 Australia Ph: +61 8 9322 7600 Fax: +61 8 9322 7602 Email: email@example.com Web: www.cottoilandgas.com.au Projects Pandora, PPL437, PPL436, PPL435, South East Papua Study, EP325, WA 460-P (Palta) Market Capitalisation $A9.3 million (at press time) Quoted shares on issue 66.6 million Shares at Time of Float 46.8 million 52 Week High 20c 52 Week low 10c YTD Change % -.04% 47
Cott OIl & Gas’ drill crew in PNG.
areas of high exploration potential. “The key now is to find adequate capital to advance these projects and we are working on structuring deals in an appropriate way,” Dimsey said. PPL437, which it was focusing on before the Pandora deal was completed, is still a high priority for Cott, which sees the asset as a source of additional reserves in the Western Province. Kina, the operator of PPL437, is farming down part of its interests to Heritage Oil and the JV is working towards acquiring a 2D seismic survey there in the first half of 2014. While Dimsey told RESOURCESTOCKS readers in October that the company was holding talks with potential farm-out partners for PPL437, Cott has decided after reviewing the data that it doesn’t want to farm the asset out. “It’s not something you’d give away,” Dimsey said. “It’s too good. The PPL437 prospects identified are mirror images of the Ketu, Elevala and Tingu discoveries, which collectively contain 1.2Tcf in PRL 21 immediately to the south. They are in exactly the same style of structure, but have thicker sands and are located a little bit deeper. “But they’re back towards the hydrocarbon kitchen, so the gas and liquids in PRL21 must have migrated
through PPL437, meaning any similar structures there are also likely to be hydrocarbon-charged. “We have identified fairly simple structures in PPL 437 that have high potential for very significant quantities of hydrocarbons. “We think there’s a strong possibility of finding a Tcf of gas with around 60MMbbl of condensate.” Cott’s PPL435 and PPL436 assets also have “exciting potential”. The company is still accumulating a database over those areas, with an aeromag/gravity survey scheduled to be flown in early 2014. “That will fill in a data gap we have in the Western Province and will add to the whole exploration potential of the Western Province,” Dimsey said. Cott’s 25% interest in the South East Papua Study is also still very much in play, with the company combining the aeromag gravity data acquired with its PNG technical database – which again adds to the whole picture of the Papuan Basin evaluation. “The whole area is sparsely covered in seismic and you need to use aeromag/gravity to develop a better structural geological picture,” he said. “The work we’ve done so far has been excellent as it has identified a number of areas to focus on.” Dimsey still stands by his stated expectation in October that the oil and
gas market will strengthen, and that the next round of oil and gas pricing will increase as the United States, Asian and European economies gradually improve. “We’ve already seen spot LNG prices in Asia move up to almost $US19/ GJ in the last month or so [prior to January], and one of the reasons for that is just winter demand in the northern hemisphere,” he said for this edition of RESOURCESTOCKS. “Recovering modern economies are all driven by energy, and we’re getting to a point now where energy has to be clean. These big economies don’t want pollution and gas provides you with the best way of providing clean energy.” As for PNG itself and the publicity around the government’s takeover of BHP Billiton’s Ok Tedi copper and gold mine, Dimsey, with his significant in-country experience, said that all this was merely PNG taking control of its economic destiny, which was for so long dictated by outside forces. PNG’s economy is developing with the imminent completion of PNG LNG and the many mining operations in the country. This will establish a strong base for PNG to take control of its economic destiny and demonstrate that it is a safe and positive jurisdiction for foreign investment.
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The Boardroom The Firm Cott Oil & Gas is an early-stage exploration company. It was incorporated in 2012 as a petroleum exploration company seeking acreage in Papua New Guinea, Indonesia and the Westralian Superbasin. It is comprised of professionals with years of major oil company experience in Australasia. The company is seeking to define commercial quantities of hydrocarbons (oil and/or gas) through exploration programs in highly
The Strategy prospective acreage that is accessible to markets and infrastructure.
The Shareholders Fitel Nominees Ltd 8.86% WMO Welcome PL 7.94% National Nominees Ltd 6.01% Longshot Oil & Gas PL 5.82% Andjen PL 5.77%
To take large acreage positions in proven or emerging oil and gas basins, where the company can utilise its regional expertise and database to build value. Intends to build a quality portfolio of exploration opportunities and deliver multi-Tcf & multiMMbbl drilling opportunities. Will focus on acquiring undiscovered, underdeveloped resources, and developing JVs with industry partners through its technical expertise and high-level industry contacts.
The Directors David Bradley Non-Executive Director
Andrew Dimsey Managing Director
David Bradley is an energy industry commercial specialist with 30 years of business development experience. This includes senior management roles with El Paso Corporation, Epic Energy and senior managing consulting roles with Wood McKenzie. Has also privately advised a broad range of upstream, midstream and downstream energy players in developing and executing commercialisation strategies and business development initiatives. His experience includes significant M&A coordination roles realising over $2 billion in closed transactions.
Has 30 years of finance/commercial upstream experience in senior executive positions for ASXlisted oil and gas companies. These include Beach Petroleum, Alliance Oil Development, Claremont Petroleum, Elders Resources Discovery Petroleum, ARC Energy and Origin Energy. He has expertise in oil and gas strategy, structuring and a strong background in the management of projects.
He has managed and arranged funding for oil and gas projects including Jackson-Moonie Pipeline, Drillship Energysearcher, drilling of the first Australian coal seam gas wells at Moranbah in Queensland, Drillsupport as founder and managing director (a subsea robotics installation company), pipelines, gas and oil plant construction in the Perth Basin and major gas sales contracts from Carnarvon Basin to Perth customers. He has been involved in the establishment of successful Australian companies in oil and gas exploration, as well as production, investment and service industries.
PPL437 and surrounding discoveries.
Stephen Dennis Non-executive Chairman Has extensive experience in the resources industry, covering commercial, financial and operational management roles. In 1982-1996, he held various senior management positions at MIM Holdings, including at the Mt Isa operations. From 1997-2005 he was at Minara Resources, where he held the position of group general manager and then chief financial officer. In 2006, he moved to Brambles Australia, where he was regional director of its minerals transport operations in Western Australia. He is also a non-executive director of Heron Resources and is the CEO and managing director of CBH Resources. JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Words by Jose blanco
Argentina oil & Gas analysis
Sculpture in the Church of San Domingo, Buenos Aires, which houses not only the remains of General Manuel Belgrano, but also two Spanish flags and two British flags, from the defence against the British invasions. 50
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
In the enigma that is Latin American oil and gas, some particularly canny world players have moved into Argentina in the belief that its risk perception will pick up.
hen it comes to oil and gas, Latin America is an enigma. Although the global oil and gas map has been changing rapidly in recent years, Latin America is thought to hold a fifth of the world’s oil reserves, ranking it only behind the Middle East. However, the economic upside offered by such vast reserves is tempered by the fact that none of the region’s biggest oil players – Argentina, Brazil, Colombia, Ecuador, Mexico, Peru and Venezuela – have the funds, capabilities or technological know-how to develop their impressive resources on their own. Another contradiction is that although Latin America’s oil production has grown steadily in recent years – total oil production in the region stands at about nine million barrels of oil per day – at the same time the region has doubled its reliance on the United States for fuels such as diesel and petrol. The explanation lies in the fact that the region has an outdated refining network that is unable to meet the demands of its growing economies. Nonetheless, the bottom line is that the combination of abundant resources and overwhelming need for
assistance to exploit those resources makes Latin America one of the most exciting oil and gas markets in the world. According to the findings of a report from GL Noble Denton titled Seismic Shifts: The outlook for the oil and gas industry in 2013, the Americas as a whole have already overtaken Asia as the oil and gas industry’s preferred investment destination. Whether the interest lies in Brazil’s pre-salt fields, the historic opening up of Mexico’s hydrocarbons sector, new
geoscientists. In all likelihood, it will replicate the ‘super-cycle’ that the mining sector has enjoyed over the past decade. That said, the opportunity on offer demands some caution, because few regions balance risks and opportunities in as many different ways as Latin America. Each country is taking a different approach to developing its oil and gas wealth. While some governments are seeking to attract investment and know-how, others are focused on gaining more control over the sector,
“Pressure on Argentina’s government has seen it introduce a range of measures aimed at attracting foreign investment in the country’s oil and gas sector.” JOSE BLANCO ALABC
bidding rounds in Peru, Argentina’s unconventional potential or Venezuela’s vast reserves, the region has the potential to be a key player in the global market for years to come. This oil and gas boom will incorporate all elements of activity, from exploration to production and on to refining. It will require substantial levels of investment and demand more and better-educated engineers and
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
or at least a larger share of royalties or revenues. The ability of companies to successfully operate in the region will be influenced by political and regulatory trends affecting exploration and production in individual countries, as well as by shifting social and security dynamics on the ground. While the exploitation of 51
Brazil’s pre-salt oil fields and the opening of Mexico’s previously sacrosanct oil sector are capturing most of the headlines, one of the more interesting markets in the region is Argentina.
past decade, have justifiably raised concerns about investing in the country and, in particular, its oil and gas sector. Further complicating the equation is the fact that the government’s energy policy over the past decade has ARGENTINIAN TEMPTATION boosted consumption while deterring For companies with a healthy risk investment. Until recently, tariffs for appetite, Argentina presents a electricity and natural gas were all tempting opportunity. but frozen at 2002 prices and the oil The discovery of significant oil and price was capped at $US42 per barrel, gas reserves in the Vaca Muerta fields which was typically less than half the in the Neuquen Basin, plus the yet to prevailing spot price for crude. be fully quantified resources of four These measures were introduced other major oil basins, give Argentina to help the economy recover from the a combination of conventional and collapse of 2001 and their success is unconventional oil and gas reserves reflected by the fact that economic that make it an attractive proposition growth had averaged 7% per annum for oil companies seeking to diversify over the past decade. their operations. However, that growth, plus failure A recent US Department of Energy to remove the pricing caps and report claimed that Argentina held persistent inflation, have unbalanced 802 trillion cubic feet of commercially the energy market. The government’s viable natural gas resources trapped policy necessitated subsidising the in shale rock and 27 billion barrels costs of energy companies by more of oil, the bulk of it in Vaca Muerta. than $US10 billion in 2011, with These estimates make Argentina the Argentine consumers paying far second-largest holder of shale gas below market rate for their electricity. reserves after China and number four In fact, up to four times less than their in shale oil. neighbours in Brazil. However, the 2012 expropriation Also in that year, Argentina – of integrated oil company YPF which had once been a net exporter from its Spanish parent, Repsol, of natural gas to Brazil and Chile – combined with the somewhat erratic became a net importer of energy for and interventionist policies of the the first time since 1984 and, in doing Kirchner governments over the so, incurred an import bill for oil and
gas of $US9.4 billion, equal to about 20% of the Central Bank’s foreignexchange reserves. Recognising that this situation is unsustainable, the government has started to modify its policies. Residential consumers have already been informed that their electricity tariffs will rise by up to 72%, but there are considerable constraints upon the government going much further too fast, as higher tariff rises will boost inflation – estimated at 26% in 2012 – and most likely result in considerable social discontent. Beyond the retail sector, the pressure on the government has seen it introduce a range of measures – including tax incentives, differential pricing and reduced restrictions on capital repatriation – aimed at attracting foreign investment in the country’s oil and gas sector. Among the key measures introduced in 2013 are: • Decree 927, which aims to incentivise companies by reducing the import duties payable on certain capital equipment. The decree creates a significant cost reduction for oil companies operating in Argentina by removing the 35% import duty that was previously applied to oil and gas drilling rigs, and the import duty for other oil and gas equipment from 35% to 14%.
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“For companies with a healthy risk appetite, Argentina presents a tempting opportunity.” JOSE BLANCO ALABC
natural gas price that is significantly higher than the spot price. Currently the Argentine government pays $US7.50/MMBtu, which is a premium of 105% over the spot price of $US3.66/MMBtu. While costly, this measure helps to reduce energy imports by improving the balance of payments and is almost 32% lower than the price that Argentina pays per MMBtu imported from Bolivia.
Canny foreign players are increasingly prepared to gamble that Argentina will become a much more welcoming and rewarding market from this point onwards. They are betting on a change of government at the next elections in 2015 and the fact that whoever is in power will be • Decree 929, which creates a obliged by market forces to grow its significant incentive for oil companies oil and gas reserves and production, to invest in Argentina by allowing so as to ensure that Argentina remains those companies that invest more than a net energy exporter and is able to $US1 billion over a five-year period to continue generating hard currency sell 20% of their production at world from those exports. prices without paying export taxes. They are not disregarding the It also exempts those companies ongoing risk profile of Argentina, but from retaining the proceeds of those they see the government’s desperation sales in Argentina, allowing them to to increase production and thus avoid dispose of those profits as they deem a balance of payments crisis, plus appropriate. the improved operating environment • Allowing domestic oil prices to offered by the above incentives go higher than the prevailing cap and the fact that Argentina has of $US42/barrel. They are now solid production and transportation determined through the application of infrastructure, as mitigating that risk an export parity factor that is intended and justifying getting into the market to equalise the realised prices between before it takes off. export and domestic markets. A preliminary agreement This has seen the introduction a announced in late November, for sliding-scale export tax regime. With the Argentine government to finally the spot price for WTI now at just compensate Spain’s Repsol for seizing under $US94/barrel combined with its stake in YPF is expected to kickthe level of current oil demand in start a wave of investment. Argentina, the gross selling price is Shortly after the signing of the effectively set at around $US78/barrel agreement, Argentina’s new cabinet for Argentina’s primary oil blend. chief, Jorge Capitanich, told a press Although this price per barrel is conference that, “We are building a still noticeably lower than the current path that will allow for an increase spot price for light sweet crude, in hydrocarbon exploration and this pricing structure has made exploitation” and that Argentina has investing and operating in Argentina a “very ambitious” energy program more enticing for oil companies, scheduled for the years ahead. particularly when it is considered YPF is the biggest stakeholder in that development costs per barrel are Vaca Muerta and has estimated the generally lower than North America. field’s reserves at 661Bbbl of oil and • The government has agreed to pay a 1181Tcf of natural gas. JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Its vast potential and the improved market conditions have seen a growing number of international players commit to the project. Oil giant Chevron Corp. has agreed to invest $US1.24 billion in the area; Dow Chemical Co has committed to invest up to $US120 million in 16 Vaca Muerta gas wells; US-based Apache, ExxonMobil and Americas Petrogas also have rights to explore in some 6.8 million acres along with YPF. Other companies with a slice of the formation include France’s Total, Canada’s Madalena Ventures and Azabache, Royal Dutch Shell, the local affiliate of Brazil’s Petrobras, Argentina’s Tecpetrol, and Pan American Energy, which is controlled by Britain’s BP. While the government’s more moderate approach appears to be having the desired effect, foreign players entering the market should keep close watch on not only macro political, security and integrity issues at the national level, but also on local issues that prevail where the resources are located. A multitude of factors need to be monitored, including, but not limited to the possibility of any opposition to development on environmental, social and/or cultural grounds. On another front, the government has resorted to creating state-owned firms in an attempt to play a more significant role in the energy sector. In 2004, former president Néstor Kirchner established Energías Argentinas (Enarsa), a company responsible for the exploitation, production, industrialisation, transport and trade of oil and gas. At the provincial level, proKirchner governors have taken a similar approach, demanding that private firms operate jointly with local state-owned companies such as Petrominera Chubut, Gas y Petróleo de Neuquén and Fomicruz (in Chubut, Neuquén and Santa Cruz provinces, respectively). Clearly, investing in Argentina’s oil and gas sector is not plain sailing, but the potential rewards on offer appear sufficient to warrant getting into the game. 53
Words by Anthony barich
latin america update
exhale Chile and Brazil face long-promised monumental reforms to their mining codes, while Peru is fine-tuning its own overhaul. One thing is certain: miners will pay more. The question is - how much, given the strong contribution resources have made to both their economic growth of late.
veryone knows Chile is ‘Mining 101’ as far as ease of business goes, as evidenced by the plethora of Aussie explorers and global producers operating there. Brazil, too, has been a traditionally strong investment drawcard, especially out of Vancouver but from further afield as well, including Australia and London. The great run miners have had in policy stability, business-friendly tax terms for foreign companies and
“Michelle Bachelet is set to inherit a Chilean economy which has become increasingly vulnerable to external shocks.” MICHAEL HENDERSON ECONOMIST 54
generous water usage rights in Chile is almost certainly due to be at an end, or will at least be toned down. The question is, how far will new socialist President Michelle Bachelet - who was set to win the country’s elections as this magazine went to print - go? Explorers and miners tapped into the needs of their local communities would be well aware that water and power are scarce, particularly in the north where many of them operate, which has led to rising water and power costs. Moreover, labour costs have risen significantly due to availability of labour. Improving education and, therefore, the number of engineers etc available to the mining sector would relieve some pressure from the labour market. The problem is, the government provides incentives for banks to provide students with loans so they can undertake studies, so the students are ending up with significant debts
back to the institutions that provided the loans, which is part of the reason why there has been some upheaval. To fix this, Bachelet has proposed to overhaul the current 1980 Constitution, introduced by Augusto Pinochet’s military dictatorship. However, local analysts have labelled these plans “ambiguous” and “unclear” at best. Her electioneering statements were as fearsome as they were bold. Her broad mining reform program said the new constitution would “recognise full, absolute, exclusive, unalienable and unlimited public control over water [and] mining”. However, those close to the situation urge calm. Jose Blanco, chair of the AustraliaLatin America Business Council, told RESOURCESTOCKS that while there had been plenty of speculation of policy changes for miners, he would be surprised if the new
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Chilean government would deviate signiﬁcantly from what has been the established template over more than two decades, which had underwritten Chile’s sustained economic growth. “The pressure is to provide improved economic conditions to reduce the cost of education burden for students and that’s all going to require budget allocation, which is why we may well see some increase in the overall tax take; and the issue of water and power of course has to be dealt with as they are important issues for Chile, particularly for the mining sector in the north of the country, where both are in relatively scarce supply,” he said. “So there needs to be a coordinated policy, which will ensure that the measures that are implemented are the most effective within a reasonable operating environment. “They will try to balance support for key industries that have underpinned Chile’s growth with the need to make some modiﬁcations to as to address the current demands of the wider society.” Water is an especially contentious issue because under the water code introduced by Pinochet, miners have the right to use any water found during their work, which critics say is virtually “privatising water”. Bachelet’s reform program faces a funding struggle given falling copper revenues and slowing growth, especially as she has espoused free education for all university students. Chile has the second-most expensive private university system of any OECD country, after the US. Economist Michael Henderson wrote in Capital Economics in November that the recent fall in the copper price could cause the deﬁcit to balloon because Chile accounts for almost a third of global production of the red metal, which provides about half the country’s export earnings. “With investment weakening and the current account deﬁcit uncomfortably wide, Michelle Bachelet ... is set to inherit an economy which has become increasingly vulnerable to external shocks,” Henderson said. “A sudden and sustained fall in the price of Chile’s key export, copper, could cause the deﬁcit to blow out, requiring a sharp reduction in domestic demand.”
Since 2008, Brazil has been discussing mining reform, but has been spending as much time
discouraging speculation as it has ﬁguring out ways of increasing royalties. Last November, the government’s mining reform committee decided to postpone a vote on a proposed legislative overhaul until February, amid disagreements between politicians about whether the government should allow royalty rates to be established within the legislation, or set later by decree. Like Chile, the rampant inequality between those who have proﬁted from the mining boom – government bureaucrats – and the have-nots has sparked much unrest and protests, directed not at the miners but at a government bruised by corruption convictions and poor economic management. From Belo Horizonte to Salvador, Brazil’s elite have succeeded beyond their wildest dreams in the past decade. And while a middle class is gradually emerging now, some 80% of the country’s 200 million are in the expanding lower class. This lower class is seething at a government where bureaucrats are being paid annual pensions of $US200,000 a year – which local watchers have called absurd, obscene sums that have been legally expropriated for the elite. Thus signiﬁcant pressure is on government to level the playing ﬁeld, and with the resources sector such a major contributor to economic development, government response has been to seek a much more signiﬁcant contribution to the national coffers from resources than ever before. A prime example of this is mining giant Vale, which the government was suing for a staggering $US20 billion for reimbursement of taxes it claimed Vale didn’t pay with respect to its international proﬁts. Vale settled the case in November for $US9.58 billion – one of the largest tax settlements over the last several years to do with the mining sector. Amid all this, Brazil has struggled. Amid the excitement of the BRICs (Brazil, Russia, India, China and South Africa) the reality is that Russia and Brazil have not kept pace with the likes of India, China, South Africa or Indonesia. Brazil President Dilma Rousseff, who faces re-election in 2014, told Spanish newspaper El País late last year that a forthcoming statistical revision would raise economic growth from 0.9% in 2012 to a less weak 1.5%.
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Presbitero Maestro Cementery, the oldest Peruvian Cementery, dating back to 1808. Just as this figure appears to be waiting, or mourning, so too is the mining industry in Latin America’s three strongest jurisdictions waiting to see what the future will hold for them. 55
A panoramic of the Andes (incl Peru’s highest mountain) on the approach to ASX-listed Commissioners Gold’s Anita mine.
There has also been a signiﬁcant depreciation of the Real. There have been issues about how Brazil’s National Department of Mineral Production (DNPM) would have authority over the regulatory aspects of the resources industry and the proposal of a new mineral resources authority for the country; along with increases in mining royalties and talk of a ‘use it or lose it’ policy that forces companies to let go of their tenements if they don’t progress them over over a period of time. The big issue for Brazil has been the non-passage of the mining law, with heavy lobbying from the likes of Vale and other miners to slow the process. For about a year the DNPM refused to process applications or amendments to mining and exploration leases pending the passage of the law. The DNPM eventually gave in after a backlog of a year, but it’s still a sizable issue. Norton Rose Fulbright partner Robert Milbourne, a cross-border resources specialist with experience working in China, Brazil, Indonesia, PNG, Australia and the US, said that all this poses an important, bigpicture question for explorers and investors. “It is constantly a battle between what is the prospectivity and the
yield of your investment versus the cost you have to pay – the cost is in royalties and taxes and imposts, and the political uncertainty,” Milbourne told RESOURCESTOCKS. “I think the question investors, and resource juniors in particular, need to think about is whether the infrastructure and prospectivity of a country like Brazil is sufﬁcient enough to justify the challenges of dealing with the bureaucracy that are impediments to successful project development.” For many companies, Milbourne said, the answer was still a resounding yes. ASX-listed companies such as Centaurus Metals, South American Ferro Metals and Crusader Resources have successfully developed projects in the Brazilian market in the middle of this downturn, navigating themselves through the way the government manages approvals. So there are clearly upsides. “Is the regulatory framework easier to navigate than in Queensland, WA or Canada? Perhaps not, but you have more opportunities in Brazil than you might have here [in Australia],” was Brisbane-based Milbourne’s educated assessment.
than $US30 billion – collapsed into bankruptcy. Levered over oil and gas investments that were then connected to shipping, logistics, ports and mining, the empire spanned a series of connected listed vehicles, which all suffered when the behemoth fell. Subsequently, a major southeastern port and industrial development he was working on has been delayed. That port is a key export channel for the country and until that gets up, junior developers will be challenged in accessing the seaborne market. However, Milbourne noted that there was also signiﬁcant internal demand that allowed companies to not necessarily seek export channels for productive mine development.
PERU POSTER BOY
Meanwhile, Peru, the rising star, continues to be a picture of stability amid the relative chaos in its nearest Latin American competing nations. Having negotiated an agreement in 2011 to have miners pay higher royalties as part of an overhaul that would see them pay on operating proﬁts rather than sales – similar to the system in Chile – Peru then rebuilt environmental regulations last year. For explorers, these have basically meant increasing the information MELTING MOMENT required for mining-related activities. A major event occurred last year Ross Brown, managing director of when Eike Batista – the richest man in Peru copper porphyry developer Inca Brazil whose empire soared to more Minerals, said that while this meant more spending on green and red tape, “it’s money well spent, because we now have virtual guarantees of “It is constantly a battle between what is drilling programs going ahead”. This is because Peru has now the prospectivity and the yield of your adopted a system more in line with investment versus the cost you have to pay.” Western Australia’s ‘program of works’ system whereby, in the ROBERT MILBOURNE NORTON ROSE FULBRIGHT Australian context, companies gain indigenous and environmental
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approvals for any ground-disturbing work. In the Peruvian context, all agreements between explorers and communities are attested on a public registry, so recalcitrant communities can’t renege on the deal they’ve made if they change their minds. “This is something [Peru President Ollanta] Humala himself was keen to introduce,” Brown said. “Mining is so important to the Peruvian economy that even though
they have sensitivities around the Andes and various communities, they just can’t afford not to have a mining sector,” was Brown’s explanation of the need for the smooth if rigorous processes Peru has adopted. While there is strong resistance to mining in Peru on environmental grounds, Brown believes it is very typically not by those directly impacted communities but those nearby who have missed out.
“It’s often those who see the trucks roll past but don’t have any royalties themselves,” he said. “And of course, the Amazon is a no-go. “There are some foolish companies who want to go there, but it’s just not going to happen. “There is a global interest in preserving the Amazon. “You’re silly to even think that you might be able to go there.”
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FIRST MOVER SETS THE PACE IN LATIN AMERICA Australian junior Latin Resources ended 2013 on a high and is well placed to surge ahead in two pro-mining countries in South America. Ngaire McDiarmid reports
Latin Resources says its Borborema iron ore project in Brazil has huge potential.
opper and iron orefocused Latin Resources is reaping the benefits of being first in, best dressed. Its Peruvian portfolio includes the flagship Guadalupito 1.3 billion tonne iron and heavy mineral sands resource with a potential 56-year mine life, as well as a lucrative joint venture at Ilo Norte that is already pouring money into the coffers and funding an immediate drilling program. In Brazil, the company’s aim to find a greenfield project close to infrastructure with near-term production potential has quickly been fulfilled – in November Latin bought Rio Tinto’s promising Borborema iron ore project in Rio Grande de Norte district. Latin Resources was one of the first Australian juniors into South America and managing director Chris Gale said having “first mover advantage” meant the company had been able to secure land in the world’s next copper hotspot in Peru.
The Peruvian economy has been growing steadily at more than 5% each year and will be one of the world’s 30 main economies by 2050, according to ProInversion, the government’s agency to promote private investment. The stable country has no discrimination against foreign mining companies and has an enviable status as the world’s second largest producer of copper and silver and third largest of tin and zinc. In 2008, Latin Resources was just the third junior Australian explorer in Peru but has since been joined by 17 others. In the same timeframe, the number of Aussies having a go in South America has grown from 20 to 80 and many more are predicted to turn their attention to the continent. “In 2012, 25% of all global exploration dollars were spent in Latin America,” Gale said. “By 2020, there will be six countries in Latin America capturing 50% of global mining investments, including Chinese companies spending $100 billion.” Gale said being a first mover meant Latin Resources had been able to beat the majors to highly prospective regions, including gaining 130,000 hectares in the Ilo district. “We’ve been able to stake a major portion of the hottest copper district in Peru,” Gale said of the company’s Ilo holdings. He said the opportunities in Latin America were just not possible in Australia and he cited the company’s recent landmark deal at Ilo Norte. Compania Minera Zahena SAC is spending $US9 million to earn 70% of Latin’s Ilo Norte iron oxide-coppergold project.
Ilo Norte is an advanced exploration project with a very large alteration system at least 10km long and several hundred metres thick. Under the earn-in option, Zahena will pay $3.65 million over a fouryear period to Latin plus spend $4 million on exploration including an immediate 4800m diamond drilling program. Gale said the agreement allowed for the short-term realisation of value at Ilo Norte with exploration on a very exciting target in the heart of a major copper production region, which had 125 billion pounds of copper in published reserves and resources within a 100km radius. “No junior in Australia this year has been able to secure such a favourable deal as a joint venture, where someone is going to put serious money into the ground and above that pay us $3.6 million,” he said. “You can’t do deals like that in Australia especially as a greenfields project. “Australia is too costly to do exploration and there’s no way at the moment for a junior to raise money in such a poor capital market.” Latin Resources is in talks to strike a JV deal this year for its flagship Guadalupito iron and heavy mineral sands project. The company says the project has world class potential with a 1.3Bt resource and an exploration upside of 4Bt. The project reached an important milestone in December when the Peruvian government granted crucial surface rights to key parts of the project area. Gale said it “de-risked” the project and increased its attractiveness to potential JV partners.
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“Guadalupito is advanced and we’re now looking for a joint venture partner to take us into production within the next two years.” chris gale latin resources
“Obtaining surface rights for mining projects in Peru is a significant accomplishment often only achieved towards the end of feasibility,” he said. Guadalupito’s primary minerals include magnetite, andalusite, ilmenite, rutile, zircon, monazite, garnets and apatite. “It’s advanced and we’re now looking for a joint venture partner to take us into production within the next two years,” Gale said. “The government has been very supportive and Guadalupito will be the first mineral sands production in the west coast of South America. “This is something we can pull out of the ground, concentrate and provide a final product to market very quickly.” In the meantime, the Ilo Norte deal and Latin’s recent sale of the Mariela IOCG/copper porphyry project to Total Genius Iron Mining for $2.5 million has cash flowing in. Investors have also shown their support for Latin’s upward trajectory with three separate share placements raising more than $A5.4 million during 2013. Latin’s most recent portfolio addition is the Borborema iron ore project in Brazil, another area where the company is enjoying first mover benefits. It purchased mineral rights over 40,483ha from mining giant Rio Tinto, with Latin saying Borborema is close to infrastructure and has the potential to hold a significant resource. Rock chip samples have shown up to 41% iron and the project has the potential to produce pellet feed fines with very low levels of contaminants.
“We think we’re going to be a first mover into an area that has great infrastructure, rail and roads, which can be used by third parties and the two operating mines in the vicinity have proved that you can get into production quite quickly,” Gale said. Gale’s involvement in South America has been recognised by his appointment in 2013 as chairman of the Council on Australian Latin American Relations, which was established by the Australian government in 2001. He said the mood in Latin America was far more buoyant than the doom and gloom witnessed in other markets and the company was set to make the most of its opportunities. “We’re first mover in two great countries with a culture of mining,” Gale said. “The big boys have been there for many years and we’ve been there for five years and have achieved a lot in a very short timeframe. “Our scoping study is finished and a resource has been established at Guadalupito. “We’re starting mine planning and a feasibility study for Guadalupito and we’re looking for a joint venture partner to take it into production by the first quarter of 2016. “Drilling is starting at Ilo Norte early next year and, in Brazil, we’re developing our iron ore project, which is close to infrastructure and has huge potential.” Latin Resources looks set to reap further rewards this year as it consolidates its position in the increasingly popular mining hotspots.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Latin Resources is enjoying first mover benefits in South America.
latin resources at a glance
Head Office Suite 2, Level 1 254 Rokeby Rd Subiaco 6008 Australia Ph: +61 8 9485 0601 Fax: +61 8 9321 6666 Email: email@example.com Web: www.latinresources.com.au Directors David Vilensky, Chris Gale, Frankie Li, Zhongsheng Liu, Mark Rowbottam Market Capitalisation $A16.1 million (at press time) Quoted shares on issue 229.7 million Major Shareholders Junefield High Value Metals Investment 20.35% Dempsey Resources 11.03% SCW Red (SCW 2009 Investment A/C) 3.85% SRP Red (SRP 2009 Investment A/C) 3.44% JP Morgan Nominees Australia 3.37% 59
rum jungle resources
potash explorer on the move to producer Three milestones over the past year have Rum Jungle Resources well on the way to transforming from an exploration company to a producer – with plenty of exploration upside. Anthony Barich reports
t’s been quite a year for Northern Territory-focused Rum Jungle Resources – taking over Central Australian Phosphate (CEN), raising $10 million in November in a tough capital market and getting prefeasibility studies underway for both its Ammaroo phosphate and Karinga Creek potash projects. By undertaking the two studies and picking up more ground both in the NT and across the southern border into South Australia, Rum Jungle has locked itself into the phosphate and potassium space and improved its position further. The capital raising is a result of having a solid institutional shareholding. Rum Jungle’s top shareholder Washington H Soul Pattinson (15.5%) is a renowned canny investor and there are many other institutional investors that own nearly half of Rum Jungle’s stock. It is unheard of among its competitors, which barely have an institutional shareholder in their registries. “These achievements mean we’re emerging from an exploration company into a producer. We have the big names, the substantial shareholders. It’s an exciting time,” Rum Jungle managing director and CEO David Muller told RESOURCESTOCKS. Taking over CEN leads Rum Jungle towards in excess of 1 billion tonnes of phosphate on the western side of the Georgina Basin. When readers last saw Rum Jungle profiling in RESOURCESTOCKS in March last year, the company had 238 million tonnes of phosphate at Ammaroo. If it wasn’t a world-class deposit then, it certainly is now. Importantly, Rum Jungle has also in the past year accelerated developments with its potash play, highlighted by the fact it has brought
in Chinese International Chemical Consulting Corporation – advisers to world-class schoenite and potassium sulphate brine projects – to do the PFS on Karinga Creek. “The chemistry of our brine is very similar to the Chinese brine at Luobopo, in that it’s rich in sulphate, magnesium and potassium, so we have schoenite which crystallises from brine solution but from that you also need to produce potassium sulphate and they can do that without any chemical reaction,” Muller said. Another industry leader, Australian outfit Worley Parsons, is undertaking the PFS on Ammaroo. Both studies should be completed by mid-2014, which will give Rum Jungle some direction as to which project to push ahead with first. “The potash project could be a lot easier as it’s a huge market, so has attracted plenty of interest,” Muller said. “The Chinese import 6 million tonnes of potash a year, Australia only imports about 600,000t. There are no manufacturers in Australia so it would be a great product to have and it’s a premium price, worth $600/t, so rail freight doesn’t become a major cost factor like it does with a bulk commodity like phosphate, which sells for only $140/t in the current market but has recently been over $200/t. “The biggest operation in China is Luobopo, which produces 1Mtpa of potassium sulphate. The biggest shareholder is China Development Bank, another state-owned enterprise, like CICCC. “They all work closely on projects so the association is sure to open further doors in China.” Commenting on the announcement of getting CICCC on board, Muller said discussions with various parties in China impressed him with respect to CICCC’s depth of knowledge and
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ability to easily access other stateowned entities to provide guidance and information. While the company is on the way to move on from explorer status, it is certainly not leaving exploration behind. Rum Jungle has picked up a whole lot of extra ground near Tennant Creek right on the railway line where there are known phosphate occurrences, so the company will continue exploring “with a view to finding something even more attractive in terms of infrastructure”. “Geoscience Australia has just released a map of the potash potential of all Australian lakes, grading it from 4% contained potassium down to 1%,” Muller noted. “To our surprise, Lake Amadeus was all highest grade, as was Lake Torrens in South Australia and we’ve just covered those two areas with exploration licences as well.” The company also has ground A production trench over major lakes on the Western that Rum Jungle cut Australian-NT border, such as into a lake. Lake Mackay, which was also
“These achievements mean we’re emerging from an exploration company into a producer.” david muller rum jungle resources indicated as high grade on Geoscience Australia’s recently revealed data. That said, however, Rum Jungle has concentrated on the Karinga Creek project spread over about 120km which, while smaller, has great infrastructure, is right on the rail line and is near the highway. The scoping study on the Ammaroo phosphate project completed in March 2013 came up with three scenarios – and it looks like the logical path is to develop phosphoric acid onsite. This was a surprise to the company, which believed infrastructure costs wouldn’t be as high as they were. “If you’re shipping a bulk commodity, then you’re much better off transporting a higher value end product to help absorb freight costs, which then become infintesimal to the overall costs,” Muller noted. “Phosphoric acid is worth $1000/t, so instead of finding markets and exporting millions of tonnes of rock and loading in Darwin, the extra capital cost of building a phosphoric acid plant onsite may be more attractive but we’ll let Worley Parsons work that one out.” Both Ammaroo and Karinga had huge resource upgrades since readers last saw Rum Jungle in March last year. The production trench photo published in this profile reveals the first time the company has been allowed to cut trenches out into lakes. It cut four such trenches and mass produced brine for 30 days. This provided important information as to likely flow rates and included regular assay data confirming consistency of grade during the pumping tests. The graphic published in this profile highlights the takeover of CEN, illustrating stages 1 and 2 drilling. 62
The three phases Rum Jungle completed stage 1 so of the Ammaroo knows the phosphate is there, and it project. was just waiting on the assays at the time of writing. Stage 2 starts in March and is set to take three months. It is stages 1 and 2 that will hopefully confirm Rum Jungle has in excess of 1Bt of phosphate rock. “In the Arganara resource, CEN has 313Mt and Rum Jungle’s Barrow Creek 1 deposit has 238Mt next door, so there’s 550Mt in those two resources that have been JORC-compliant – and all that stage 1 and 2 drilling will more than double it,” Muller said. “The entire project is now called the Ammaroo project.” In terms of schedules, 2016 looks to be a realistic production schedule for both the Ammaroo and Karinga Creek projects – the perfect time, in the Perth-based executive’s experience. Referring to his first job with the Electrolytic Zinc Company of Australasia (EZ Industries), Muller said it had the good fortune to open several newly discovered mines. “The boss always used to say that the best time to put a mine into production is when everyone thinks it’s coming to the end of the world, because by the time you get the thing up and running, everything has come out of recession and things are on the go,” he recalled to RESOURCESTOCKS. “Never try to put a mine into production in the top of the cycle.” Reflecting on the pending world demand for fertilisers in the growth region of Southeast Asia and China, Muller added: “If it looks like it works in this sort of scenario then do it, because it’s only going to get better”. That certainly seems like the mantra shareholders should have in mind when it comes to this Australialisted company.
rum jungle resources at a glance
Head Office Unit 20, 90 Frances Bay Drive, Stuart Park NT 0820 Australia Ph: +61 8 8942 0385 Fax: +61 8 8942 0318 Email: firstname.lastname@example.org Web: www.rumjungleresources.com.au Directors David Muller, Robert Annells, Jeff Landels, Chris Tziolis Market Capitalisation $A53.1 million (at press time) Quoted shares on issue 353.7 million Major Shareholders Washington H Soul Pattinson 15.5% Regal Funds Management 8.6% Farjoy 7% Lion Selection Group 5.1% Acorn Capital 3.75%
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XXXXX UPDATE potash UPDATE
Words by Words Anthony by AUTHOR barich
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chaos theory: hype overrated At least one key Australian player is unconcerned about the chaos that swept over the global potash industry, particularly in North America, in 2013. Potash headframe in Allan, Saskatchewan.
um Jungle Resources managing director David Muller views the chaos that wreaked havoc with the global potash market in 2013 with mild amusement. Last year, Russia’s Uralkali broke away from Belarussian Potash Company, the European potash marketing arm, which subsequently hammered potash prices along with North American potash producers, among others. The price dropped some $US150 a tonne but Muller believes it will stabilise over time. However, a clear distinction must be made considering the cartel dealt in potassium chloride, while Australian potash and phosphate junior Rum Jungle is involved in potassium sulphate. “The difference is that you can’t use potassium chloride in fertigation and irrigation, you just build up
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acidity and salinity. Potassium is great for plant growth but the chloride is terrible,” Muller said. “So you can only use it in small amounts in broadacre farming, like 100 kilograms to a hectare is fine but if you keep doing it you will build up acidity and you need to put lime on to counter it. “But potassium sulphate is totally different. Sulphur is a fertiliser as well, so it’s a much better product – it doesn’t build up acidity, sulphur breaks down. That’s why it’s worth $200 a tonne more. “For example, there’s a huge market in Malaysia for application in palm oil plantations. And the Chinese will use it in rice plantations, so we’re totally insulated from that cartel thing.” The only way you can produce potassium sulphate cheaply is out of the brine. Muller noted that 80% of the world’s potassium sulphate was made from potassium chloride by mixing it
with sulphuric acid, a very expensive process. Meanwhile, 15% of the world’s potassium sulphate is produced from the brine lakes in Salt Lake City in Utah, the Atacama Desert in Chile, from China and soon from Australia. “So it’s an absolute premium product,” he said. “The average cost of production in the US is about $200/t and it sells for about $600/t, so it’s a speciality product for irrigation, where you’re using intense fertiliser to enhance not so much crop but plant growth like palm oil and vegetables. You need to use potassium sulphate, not potassium chloride.” Russia doesn’t have any potassium sulphate, only potassium chloride, so it would have to buy it or make it from sulphuric acid. Rum Jungle believes demand for phosphate and potash is forecast to grow significantly between 2010 and 2030. 63
African mining indaba special
A giraffe silhouetted against a dramatic clouded sunset in South Africa â€“ the nation that insiders say is experiencing a rebirth. 64
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY NGAIRE MCDIARMID
ASHES After a rough few years, a new dawn is emerging for South Africa’s beleaguered mining industry.
S SOUTH AFRICA begins the next chapter following the death of former president Nelson Mandela, the mining sector is also enjoying a fresh start. Low production results and labour unrest resulting in dozens of deaths have marred the South African mining industry in the past two years. But optimism for the future is growing, with industry ﬁgures reporting increased investor interest and the South African government moving to reassure people a new chapter is beginning. The renewed investor interest in South Africa-based mining projects comes too late for some. JANUARY/FEBRUARY 2014 RESOURCESTOCKS
One executive whose mining company redirected its interests to a different continent said the writing had been on the wall for a South African meltdown. “Two years ago, we could see what was about to hit the fan and started planning to get out,” the executive, who declined to be named, told RESOURCESTOCKS. “Fortunately we saw it before it happened so we had the wheels in motion.” The ﬂashpoint was a violent strike at Lonmin’s Marikana platinum mine in 2012 where at least 44 people died, which he said “put the fear of God into the international mining community”. He said the ﬁrst signs of the wheels
falling off were dysfunctional public services further ﬂawed by corruption. “You get a layer sitting on top of that: problems with unions, labour relations, major unions ﬁghting among themselves and them collectively ﬁghting the mining companies and the mining companies ﬁghting against the government,” he said. “You had no one wanting to ﬁx the labour relation problems, to such an extent that it became more convenient for the large platinum producers to start reducing production than ﬁx the problems. “You can’t raise a red cent on South Africa now, it’s just a place you don’t want to be.” He had little conﬁdence in the 65
A jaguar from behind a fence. South Africa was once the prince of the mining kingdom but recent events have hurt its risk rating.
to occur again and certainly there are strategies that minimise such risks,” he said. “South Africa has for many years supported a lot of foreign investment in the resources industry. “If you look at the coal industry in the north of Limpopo, there are Australian and other companies who’ve recently invested a lot of money into developing the last great reserves of coal in South Africa, so there are other players in the game who see South Africa as a good place to be.” He said South Africa’s infrastructure and bureaucracy compared favourably with other mining jurisdictions and he was excited about the prospects at Moonlight. “We’ve got metamorphosed banded ironstone formations that will produce the highest quality magnetite product in the world,” he said. “Our product will be a niche ability of the government to bring industry that is resurgent, resilient and product that we believe modern steel about positive changes, a perspective is able to function successfully to its makers will want and the recent South African Deputy President full realisable potential,” she said in investment by Anvwar is recognition Kgalema Motlanthe is keen to her address. that others feel the same way we do.” address. Australia-based iron ore developer Another man noticing investors During an official visit to Canada Ferrum Crescent is justifiably warming up to South Africa is in November 2013, Motlanthe confident about improving conditions, Deloitte’s Perth-based Jacques described mining in South Africa having successfully attracted millions van Rhyn, who has spent 25 years as “a sunrise industry,” according of investment dollars for its flagship advising energy and resource to an interview reported in Creamer Moonlight iron ore project in South companies on tax and legal issues. Media’s MiningWeekly.com. Africa. Van Rhyn, an international tax and “While some people would want Ferrum raised $A1.5 million in transfer pricing partner, also heads up to say that South Africa’s mining a share placement in October 2013 Deloitte’s Australia African services industry is a sunset industry, it’s in and the following month confirmed group, so he looks at Australian fact a sunrise industry,” he said, citing a $US13.5 million funding deal companies going into Africa that until legislation overhauls and planned with Oman-based Anvwar Asian recently had very limited interest in improvements to infrastructure. Investment. South Africa. His statements echo South African Ferrum managing director Bob “It’s a changing landscape in Mineral Resources Minister Susan Hair said the company took a longthe last six months,” he said but Shabangu’s opening address at Indaba term perspective towards South Africa. added that he had seen an increase, last year. “It’s very easy to get carried away especially in South African mining She assured delegates that with negativity in the short term about services companies. nationalism was not an option for anywhere,” Hair said. Like Australia’s mining industry, South Africa and pointed to legislative “The resources industry is full van Rhyn said the outlook for South reform and a resulting increase in the of companies big and small who’ve Africa’s was tied to the global and number of mines, people employed reacted to what they see as political, Chinese economies. and revenue from the sector. social or fiscal risk. “I think the big challenge for “For instance, the number of “If you look at South Africa, the South Africa is not so much whether mines has increased from 993 in negativity is mainly around events the demand has tapered off – which 2004 to almost 1600 today, while that happened last year and they were I don’t think it has when you look associated revenue generated grew awful events. at some of the record production astronomically in nominal terms from “However, we still very firmly announcements by some of the 98 billion rand in 2004 to 370 billion believe that if you approach it the Australian companies,” he said. rand by the end of 2011,” she told the right way you can minimise those “But if South Africa can ensure conference. sorts of risks and widen your levels of they have a stable workforce and She also acknowledged the stakeholder support.” they can increase their production, situation at Marikana and said Hair said the unrest was less about they will be able to participate in the government was working to the resources industry and more the demand from Asia even though address the poor housing and living about union power struggles and he commodity prices are slightly lower.” conditions, illiteracy and low skills believed everyone had learnt from the He did not believe South Africa’s level that contributed to the flashpoint. situation. mining industry was growing as it “We stand ready to work with all of “We’re confident that problems should compared with the rest of you to ensure that we build a mining like those that occurred are less likely Africa. JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“That is largely, in my view, attributed to political uncertainty and labour unrest but it doesn’t mean that South Africa doesn’t have a good mining industry,” van Rhyn said. “The big challenge is to manage its production output, manage labour unrest and get some form of consistency in production and normality in the operations.” He said South Africa’s had a well-developed mining system and a lower cost base in its favour but it was suffering from low production. “If South Africa can focus on getting its production and its skills up at the lower labour costs, South Africa can be very competitive and have a very big future in the mining sector,” he said. Investing in education and improving socioeconomic factors was the key. South Africa’s mining minister also called on the mining industry to focus on increasing skills as part of a long-term strategic vision. At Indaba 2013, Shabangu criticised some mining companies for their focus on short-term gains. “In order for us to leverage the population dividend for the growth of
“We still very ﬁrmly believe that if you approach it the right way you can minimise those sorts of risks and widen your levels of stakeholder support.” BOB HAIR FERRUM CRESCENT the economy generally and the mining industry speciﬁcally, we need to work collectively to design responsive skills development interventions,” she said at the time. Shabangu added that she could not overemphasise the importance of partnerships based on trust. “These partnerships must include workers as an integral part of the entirety of the mining value chain,” she said. One company prepared to place a higher value on its South African miners is Canadian company Ivanhoe Mines. Its ﬂamboyant founder, Robert Friedland, announced in December 2013 that the company would pay substantially higher wages to its workers at its Platreef platinum, gold and copper project in South Africa. In a move that could ease labour unrest and boost future production,
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international news agency Reuters reported Friedland saying that workers were getting tired of the claustrophobic, physically intense work for $US12 a day. “I don’t think they are going to do it for much longer and I don’t think they should,” Friedland told a mining conference in London. In a later statement, Friedland said Ivanhoe was proud to be attracting foreign direct investment to South Africa, creating decent jobs, supporting local economic development and helping to establish sustainable communities associated with its projects in South Africa and the Democratic Republic of the Congo. “There has been signiﬁcant progress since 1994 when Nelson Mandela led the nation’s ﬁrst democratically elected government but there is still much to be done in fulﬁlling his dreams,” Friedland said.
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JANUARY/FEBRUARY 2014 RESOURCESTOCKS
THE CHANGING FACE OF
OLYMPIC DAM The man heading up the government’s efforts on the Olympic Dam project says it will go ahead – but it may be a different beast than originally planned.
HE MAN IN CHARGE OF leading the South Australian government’s efforts to facilitate the expansion of the Olympic Dam mine is “supremely conﬁdent” it will go ahead – it just may not be as some expect. BHP Billiton announced the deferment of Olympic Dam in August last year and pledged to consult with the SA government on adopting an alternative, less capital-intensive design for the open pit expansion to improve the economics of the project. “I remain supremely conﬁdent about that project because it’s the fourth largest copper resource in the world, it’s the biggest gold resource in Australia – which people forget about, the biggest uranium resource in the world and it’s not going anywhere,” Olympic Dam Task Force CEO Paul Heithersay told RESOURCESTOCKS. “There is an emerging supply gap for copper going ahead and we need to ﬁnd an awful lot of copper in the future. 68
“We’re in that cycle now where we’re not ﬁnding the really big copper deposits anymore. The era of the big porphyry copper deposits is probably at its tail.” Heithersay is also resources and energy deputy CEO for the SA government’s Department for Manufacturing, Innovation, Trade, Resources and Energy. He believes that with the looming supply constraints, his own state is shaping up as the best chance of ﬁnding more substantial deposits. He said while Rio Tinto’s Oyu Tolgoi mine in the South Gobi desert in Mongolia was a sizable deposit, “we’re not ﬁnding them at the same pace we did 10-20 years ago”. “So we’re going to be reliant on the Olympic Dam-style deposits for a while and some of the others – so if you’re going to be looking for Olympic Damstyle deposits, where best to look but in South Australia?” he mused. “What they [BHP] are doing now in the scope of trying to unlock the value is they have a much broader brief than they had before.
“They were going down the path where ‘it’s got to be an open pit and it’s got to be done in a certain timeframe’ … well that’s changed now. “They’re going back to ‘ﬁrstprinciples’ and looking at all the options and they’re getting some very, very encouraging results. “I just think that, like most orebodies, there’s a key to unlock them. “If you look at the history of mining, there are plenty of projects around the world that took a long time to ﬁnd that key to unlock the value and I think that’s going to happen in the near future with BHP. “It’s unclear what form it will take and it’s going to take some innovation in the way they mine it – and it’s going to take innovation in the processing that they do there to bring the capital costs in line to make a long-term economic project.” Once BHP cracks the code, Heithersay believes Olympic Dam will have a 100-year mine life at least.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY ANTHONY BARICH
“So it’s a great problem to have and we’re very lucky that we have a company like BHP with the technical expertise to do it. So I remain very optimistic on that project,” Heithersay said. He added that while all projects remained reliant on the commodity price, Olympic Dam would see several cycles out – given it’s such a longterm project. “So the short-term price I don’t think is the major issue. It’s about how you set up an ongoing process,” he said. “You still need to move a lot of dirt, whichever way you do it, so do you do it in a small-staged way [and] what are the options? That’s the sort of thing they’re looking at now.” Heithersay also revealed the potted history of SA’s recent mining history – including Olympic Dam – which led to the state being one of the best places in Australia to develop a resources project. He said SA’s mining sector had always had strong bipartisan support, starting back in the early 1990s when Frank Blevins was deputy premier and Ross Fardin was director of mines, with Reg Nelson chief geologist.
Together, they convinced the treasurer to fund the ﬁrst aeromagnetic survey that any jurisdiction had done. “So SA was the ﬁrst to do widespread geophysics over the entire state and everybody duly followed and now it’s common practice around the world,” Heithersay said. “That was the big trigger, because we have a lot of cover here, a lot of ﬂat-lying desert without any outcrop so you needed that impetus of new data. “The next major thing was the ongoing development of Olympic Dam, discoveries around Prominent Hill, then the big refocus on Olympic Dam and the major drill-out program they did which went from something like 2-10 billion tonnes. “That really showed the world that South Australia was the land of the giants and there was a chance of more of those being found. “At the same time, in 2002 when the current Labor government came in, they did a state strategic plan and realised that mining was one of the key planks of their strategy, which is what kicked off the PACE [Plan for Accelerating Exploration] in 2004.
“They’re going back to ‘ﬁrst-principles’ and looking at all the options.” PAUL HEITHERSAY OLYMPIC DAM TASK FORCE “[Businessman] Robert de Crespigny convinced [former SA premier] Mike Rann that we just needed a lot more drilling in SA to see what we actually had. “So one of the key components of the PACE plan was the drilling collaboration to assist companies in drilling holes that they may not have otherwise drilled in the riskier end. “That’s paid off. The PACE plan was a combination of new pre-competitive data, the drilling subsidies that have morphed into helping with geophysics and things like radiometric data. “So the combination of early discovery, the expansion of Olympic Dam, the commitment by the government to effectively back mining as a key plank in the SA story, has led to success – which breeds success.”
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THE DANGERS OF FORTUNE TELLING Edison’s prediction that gold will reach $US2070 an ounce by 2020 has been challenged by a global binary options trading leader – but don’t count the yellow metal out yet.
Dangerous game: Tarot cards ... not quite the gamble that some analysts are taking by predicting the gold price, but a risky business none the less... 70
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY ANTHONY BARICH
N NOVEMBER 20, Edison Investment Research issued a report predicting that gold would reach $US2070/oz by 2020 based on technical analysis of historic chart patterns and inﬂation estimates, among other things. While gold is certainly the safe haven for investors, its behaviour in 2013 has been anything but a reﬂection on its popular status, plunging $200/oz in two trading sessions in April. Still, Edison was resolute. “Given the extent of quantitative easing to date, Edison calculates a longterm US dollar inﬂation rate of 10.7% (discounting a future, sharp reduction in the monetary base), under which circumstances it forecasts the price of gold rising to $US1642/oz in 2015 and $2070/oz by 2020 if real interest rates remain negative,” the report said. “By contrast, a restoration of positive real interest rates would depress the price of gold and inﬂation, such that Edison calculates a price of $1604 in 2015 and $1804/oz in 2020.” The key to gold’s prospects, Edison insisted, would be the interplay between interest rates and inﬂation. As its report was being written, the market was narrowly focused on the possibility of the US Federal Reserve’s tapering of QE3 and the assumption that this was inherently bad for the gold price. “This report, by contrast, argues that the price of gold is already at a discount to that implied, given the implicit relationship between the two, by the expansion of the US monetary base and that, far from tapering causing the gold price to fall, it will merely
cause it to rise less quickly,” Edison said. However, binary options trading platform Banc De Binary’s investors were divided about the direction of gold’s value in the second half of 2013. “On the one hand, bullish investors are concerned about the extent of monetary stimulus worldwide and the potential for a currency crisis as governments attempt to reduce debt and boost the economy, so they are turning to gold which is a safe haven asset,” Banc de Binary’s Cyprus-based co-founder and CEO, Oren Laurent, said. “On the other hand, bearish investors expect gold’s downwards path to continue, with stock markets currently at a ﬁve year high and the US economy strengthening.” In a prescient reminder, Laurent noted when talking to RESOURCESTOCKS that in July, Fed chair Ben Bernanke, asked to explain gold’s rollercoaster journey, replied that nobody really understood gold prices and he did not pretend to really understand them, either. In this light, Laurent has serious reservations about Edison’s prediction. “I see the thinking behind [Edison’s] calculation, but I am not convinced that we can forecast the price so far ahead, so precisely and conﬁdently,” said Laurent, who co-founded Banc De Binary in the aftermath of the 2009 global ﬁnancial crisis. “The markets cannot possibly have already factored in all the unknown fundamentals and public sentiment for six years in the future. “It is important to keep in mind that gold is so interesting to follow, but also harder to analyse than many other assets, because of what a signiﬁcant impact investor sentiment has on its price action.” He noted that gold dropped to $US1225.55/oz on November 25, the lowest since July 8, amid speculation that the Fed would scale back monetary stimulus – and there had been a bearish trend following the break of the $1260/ oz support level which was now providing resistance. “Theoretically, the low gold prices should stimulate and increase the physical demand,” Laurent said in November. “It is now marriage season in India, which fuels demand, and the precious metal is also becoming increasingly popular among the growing middle class in China. “However, it is possible that public sentiment could take precedent and push prices slightly lower still, so long as the Fed is in the spotlight and
investor conﬁdence wanes. Goldman Sachs has estimated that it could fall to $1050/oz by 2014 with the US economy strengthening. “Some analysts even suggest that now the gold bubble has burst, prices could go as low as $800 by 2015, but that seems dramatic and highly unlikely to me.” He conceded that at some point the fundamentals would likely kick in and positive sentiment would ensue. “Yes, the economy is improving, but there remains wide uncertainty and we still haven’t fully recovered from the 2008 global ﬁnancial meltdown,” Laurent said. “Many central banks are still pursuing money-printing policies and some analysts are concerned about a possible resulting currency crisis. “For many investors, gold will always be that safe haven asset. History teaches that although the asset can undergo price ﬂuctuations, in the longterm it is a relatively safe investment because it has an inherent value which can’t collapse in the same way that stocks are at risk of doing. “Gold symbolises tangible wealth and this very quality makes it desirable. Appetite for the commodity in China and India will probably grow steadily in the next decade. “Plus, gold will continue to be needed in electronic, industrial and medical applications due to its conducting qualities and resistance to corrosion. “So I do agree with Edison that in the mid-to-long term, investors have more reason to be bullish than bearish about gold. To what precise value it will rise though, I couldn’t say. If Bernanke is allowed to express uncertainty, so can I.” 71
COST-SAVING STRATEGy means ENTICING OFFER This gold-focused company is working hard to increase its resources and become one of Australia’s lowest-cost explorers so it can hit the ground running in 2014. Ngaire McDiarmid reports
Old workings: Cascade’s four brownfields projects hold plenty of upside.
hinking outside the BOX has set unlisted junior Cascade Resources apart from its peers as it works to become a low-cost explorer and near-term producer with an aggressive exploration campaign. Cascade has created a beneficial drilling partnership that is expected to slash two-thirds off the cost of its planned exploration program. Using management’s proven exploration track record in Western Australia’s Goldfields region, the company has put together an enticing portfolio of four gold assets, each with a JORC resource, giving Cascade a total of more than 2 million tonnes at 1.54gpt gold for 115,227 ounces. But rather than sit back and wait for the market to improve before listing, the company has negotiated three key partnerships that make Cascade an even more inviting prospect for its anticipated initial
public offering early this year. The company has secured cornerstone investments from two ASX-listed gold producers, Tribune Resources (ASX: TBR) and Rand Mining (ASX: RND), indicating the strength of Cascade’s prospects. And importantly, Cascade was negotiating a deal with a drilling company at the time of going to press that is expected to save up to twothirds of planned drilling costs. The company has exciting drill targets to explore, with previous exploration results showing multiple intercepts above 100gpt gold at its flagship Taurus gold project, 35km east of Kalgoorlie. Cascade executive director Andrew Sparke said the difficult market conditions had a negative effect on mining service companies, but the downturn in their workload had provided an ideal opportunity for Cascade. He said the drilling partnership was a win for both parties and future shareholders. “The drilling component was going to be the single biggest expense on our flow sheet, given we want to spend 70% of our IPO proceeds on the ground,” he said. “From my research, we’re talking about rates that are potentially onethird of what we see in a good market. “So there’s the potential to do significantly more drilling for the same amount of cash.” This partnership means Cascade can enter the market as a “leaner, meaner offering” with a tighter capital structure. “This puts us in a good position in a market that is quite tough for junior gold explorers,” Sparke said. “What we’ve been able to achieve
is a significantly reduced rate for drilling and hopefully a strong partnership whereby they drill for equity in Cascade. “Firstly it will align their interests with ours and they’ll be motivated to try to achieve the best results and secondly, it allows us to really accelerate our drilling program or complete a significant amount of further drilling.” Cascade managing director Matthew Sullivan said planning for the first round of the 30,000-35,000m drilling program was in the process of being finalised. “Our technical team has been very busy of late,” Sullivan said. “Once we’re up and running, our aim is to be banging holes in exactly where we want them. “Fundamentally our first drilling program will be step-out or infill drilling from previous drilling programs. “It puts us in an absolutely fabulous position and it’s fair to say we’ve got pretty high expectations of what we’re going to achieve.” Cascade’s four projects are all brownfields projects in the gold-rich Goldfields region, each with JORC resources, historic production and close to infrastructure. The company expects to be the fourth-largest landholder in the Leonora region after listing, with 81 tenements covering 12,890ha, and become one of the most active explorers with some of the lowest costs in Australia. The first drilling program is planned for Mt Stirling, where Sullivan anticipates another resource upgrade, most likely improving the JORC category. Mt Stirling, 40km northwest of
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Leonora, has a JORC resource of 31,706oz. Previous RC drilling has intercepted strong grades including 2m at 48gpt from 106m and 2m at 26.90gpt from 27m. Cascade has also identified the nearby Mt Stirling Well prospect, which it believes has a 1 million ounce potential. However, Taurus remains the flagship prospect at present with a JORC resource of 61,250oz and extremely high-value intercepts, including 1m at 290gpt gold from 8m, 2m at 146.38gpt from 8m and 3m at 115.67gpt from 135m. Waiting in the wings are Mt Keith, 60km from Wiluna, with a JORC resource of 16,500oz; and Malcolm’s 5750oz JORC resource, 15km east of Leonora. Sparke said the projects were quite advanced and Cascade hoped to make further discoveries at low cost. “If you look at the history of the cost of exploration in Australia, it’s risen from $16/oz in the 1980s to almost as high as $40/oz now,” Sparke said. “I think the market is quite frustrated by the fact that as the gold price has risen, so too have costs and gold companies haven’t been good at managing those costs. “What we’re really trying to do here is listen to that feedback from the markets and become one of the lowest cost explorers in Australia, because we’re looking to get in and have a good go but at a significantly cheaper price.” The company has built its assets based on the regional knowledge and exploration track record of Sullivan and fellow board member Shaun Richardson. Sullivan’s previous significant discoveries include the 6 million ounce Kanowna Belle deposit and the 3.5Moz East Kundana discovery
for Cascade’s key investor Tribune Resources. “With Matt’s track record of discovering gold, Tribune wants to back Matt and his ability to find gold and they’re really backing us to have a go and do it again,” Sparke said. “Wise investors follow a strategy and an executive team rather than a project. We’ve worked really hard at Cascade to develop a low-cost strategy and a management team that has a track record of executing and discovering gold. “I think there is a real need for this low-cost model in the market and a need for a very prudent and disciplined expenditure regime so that’s what we’re trying to implement. “It’s going to allow us to be very aggressive in our exploration strategy at a time when there are very few explorers actually out there putting drill holes into the ground. “It’ll give us less dilution to our capital structure because potentially we won’t have to raise as much money – so the net effect is we could be one of the most active exploration companies in this region in the next few years. “It’s really exciting for us and we’ve worked very hard at this strategy of low costs.” Investors have already demonstrated keen interest in Cascade and both its first and second round of seed capital raisings in 2013 were oversubscribed, raising more than $A1 million in total. “There has been a fair bit of interest in what we’re trying to do and the key challenge for us is to pick the timing of the market for an IPO,” Sparke said. However, thanks to Cascade’s efforts to significantly reduce costs, the pressure has eased on finding a perfect time to list, as the streamlined and focused company looks set to become a force to be reckoned with.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Cascade Resources expects to become the fourth-largest landholder in the Leonora region.
“It puts us in an absolutely fabulous position and it’s fair to say we’ve got pretty high expectations of what we’re going to achieve.” matthew sullivan cascade resources
cascade resources at a glance Head Office 104 Colin St West Perth 6005 Australia Ph: +61 8 9420 8222 Email: firstname.lastname@example.org Web: www.cascaderesourcesltd.com.au Directors Matthew Sullivan, Andrew Sparke, Shaun Richardson, Ian Hansen 73
Low-Cost Mining Project Diversity Multiple Markets
Delivering POWER to the people African Energy is the leading private developer of coal assets in the Republic of Botswana with over 6 billion tonnes of coal in resources, catering for domestic power production, export power and export coal markets. These projects provide diversity across a number of locations and markets and offer low cost start-up options prior to staged expansions to reach their ultimate potential. Dedicated project teams are taking each project through the final stages of technical studies and environmental permitting, placing the Company in a strong position to deliver multiple development opportunities: • The 2.5 billion tonne Sese Coal & Power Project offers low strip-ratio across its entire 35km strike length, and will form the basis of a competitive domestic and export power generation business. • The 2.4 billion tonne Mmamabula West Project contains some of the best quality export thermal coal in Botswana in two 5m thick seams amenable to low-cost selective underground mining. • The 1.3 billion tonne Mmamantswe Project is less than 20km from South Africa, the region’s largest power market.
African Energy Resources Ltd (ASX: AFR) Phone: +61 8 6465 5500
kin benefits from family approach Western Australia’s latest mineral initial public offering that succeeded against all odds has a few aces up its sleeve to ensure it not only survives in a tough equity market, but thrives. Anthony Barich reports
in Mining has hit the ground running since listing on the Australian Securities Exchange in October, putting some serious runs on the board at its Leonora-Laverton projects in WA. It rapidly compiled and executed a comprehensive drilling program that surprised even the experienced veterans who run the company. A “directors field trip” late last year returned some positive rock chip sampling results and gave the company a solid indication of where its targeting should focus across all six projects when all of them came up with some kind of ore-grade material. Meanwhile, supergene and primary gold intersections were returned from reconnaissance reverse circulation drilling. The primary intersection showed 24m at 2.26 grams per tonne of gold, including 4m at 6.8gpt at the bottom of the hole, which Kin Mining managing director Trevor Dixon described as a substantial discovery. The drilling was at the Eastern Gabbro prospect at Murrin Murrin and the Anzac prospect at the Desdemona project. Kin’s other projects are Iron King (brownfields) and Redcastle, Mt Flora and Randwick (greenfields). “The results were pleasantly surprising, though I was expecting to put an initial resource together at Murrin Murrin,” Dixon told RESOURCESTOCKS. “That’s not going to be the case at this time but the primary gold hits were exceptionally good.” From those positive results, he said Kin would undertake further delineating to get a handle on the geometry of the intersections that the inaugural drilling campaign did not acquire.
“That will allow us then to get some modelling in respect to some initial resources,” Dixon said. Just getting the company off the ground as an ASX IPO in October last year was a great achievement but the market response since then has been edifying for the company’s management that they’re doing the right thing – getting on with the business of exploring. The family-friendly nature that’s built into the company’s name reflected not only how the company came together but how it managed to get hold of the tremendously prospective ground it had. Dixon said his former Jubilee Mines colleague Kerry Harmanis told him to stop doing joint ventures and IPO deals and get on and do it himself. Dixon was a founding vendor to Jubilee, putting land into the Jubilee IPO in 1987. He has had a strong relationship with Harmanis ever since. Jubilee sold to Xstrata for more than $3 billion in 2007. While heading out to the northeastern Goldfields to review some drilling in November last year, Dixon got a voicemail message from an old associate he used to sink shafts with in Leonora 20 years ago telling him a critical parcel of ground he’d been craving had just become available. At the drop of a hat he drove out to the spot in the dark but he knew the area so well he found and pegged it at 9.40pm. Such is the fortune of Kin, a company with the expertise and contacts to pull off what some may consider impossible. Kin got over the line with a $2.6 million IPO raised through the novel
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
approach of sourcing investment from the very drilling companies it got to rig up exceptionally quickly for the first programs at Murrin Murrin. Then there was the initiative Kin put forward of an options issue coming out three months postlisting and the restriction agreement it entered into with its existing shareholder group – both of which were also critical parts of making Kin as attractive as possible for an exceptionally discerning and scrupulous marketplace. But as they say, it is from little things that big things grow. Between Dixon, veteran geologist Fritz Fitton – another longtime associate from Leonora who’s now a non-executive director at Kin – and chairman Terry Grammer – a geologist who was, among other things, instrumental in making Sirius Resources the success it has become – Kin’s board is a veritable tour de force.
RC drilling at Murrin Murrin.
While Fitton was at pains to paint the company as a multi-commodity stock, which it is, its focus is predominantly gold. The fact that his experience in the Leonora-Laverton area prior to 1980 was all base metals merely speaks to the upside potential for Kin. “One of our prospects is about 15km away from Jaguar – which I was involved with in 1979 – and we think we’ve got very good potential for volcanogenic massive sulphides,” Fitton said. He added that two of Kin’s announcements post-IPO highlighted that its project areas contain some evidence of nickel, copper and lead mineralisation. The company also located a couple of gossanous outcrops prior to that in the initial field trip. The yarns Dixon and Fitton recall about how far back they go in the region make the head spin, yet speak to a grassroots knowledge that should help the small-scale junior, especially considering three of its six projects are greenfields – something of a novelty in itself for Leonora, whose mining history dates back to the 1890s. “The Kin Mining family is demonstrating at this early stage their level of solidarity with the company, simply because they’re demanding of the marketplace a premium for their stock and I think that in itself has helped set us apart at the moment,” Dixon said. “There are very few IPOs that have come on and done what we have been able to do – create solidarity within the shareholder group.” The plan moving forward after the impressive December results was for a multi-prospect drilling campaign in the latter part of January, going back to Murrin Murrin, then the Crystal Ridge prospect at Iron King, Kin’s other brownfields area. “All the juniors have been working with difficult financial markets but we’re quite unique in that we’re an 76
explorer that’s actually exploring. That’s the mandate our shareholders have given us,” Dixon said. “The fact that we’re well supported in the marketplace is a ringing endorsement that we’re doing the right thing. The fact that we are focused in that one area is part of our uniqueness and of course our business model is very simplistic – a bunch of guys with very significant local credentials in a well-endowed mineral district. “We’re not chasing exotic minerals, nor working in exotic environments, it’s a simplistic approach to exploration.” Fitton, with some 43 years of experience in the area, believes Dixon has an exceptionally intimate knowledge of the approvals and native title process, enabling Kin to talk openly and frankly with native title partners. Fitton and Grammer have both been involved in the discovery of many world-class mineral deposits over the past 35 years and hope to do the same for Kin. Dixon also ran his own earthmoving business – Evandale Contracting – for about 20 years, servicing the mining industry in Leonora, so equipment was available at a fraction of the price. “There’s nowhere I can think of where everything is so close, like infrastructure,” Fitton added. Despite Leonora’s long mining history, with most of Kin’s tenements having previous workings, there are some that have not been drilled yet. Furthermore, through Fitton’s experience personally mapping the entire district while running one of Esso Minerals’ Australian divisions in the 1980s, Kin has exclusive data of the region, plus another database thanks to some $30 million worth of drilling by previous tenement holders – all of which tells Kin where not to waste money. “It’s telling us there are a hell of a lot of things with very good results that were never followed up,” Fitton added.
Drilling Resource Partners managing director Marcus L’Estrange and KIN Mining MD Trevor Dixon inspect a small historic open pit on the Iron King group project.
“The Kin Mining family is demonstrating at this early stage their level of solidarity with the company, simply because they’re demanding of the marketplace a premium for their stock.” trevor dixon kin mining
kin mining at a glance
Head Office 342 Scarborough Beach Road Osborne Park WA 6017 Australia Ph: +61 8 9242 2227 Fax: +61 8 9242 1277 Email: email@example.com Web: www.kinmining.com.au Directors Terry Grammer, Trevor Dixon, Fritz Fitton, Joe Graziano Market Capitalisation $A11.9 million (at press time) Quoted shares on issue 38.5 million Major Shareholders Trevor Dixon 17.08% Giuseppe ‘Joe’ Graziano 12.94% Goldfire Enterprises 3.82% VM Drilling 3.23% Partners & Friends Pty Ltd 3.08% JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Words by GAVIN WENDT
a surging presence in west africa
Gavin Wendt founding director MineLife Direct +61 2 9713 1113 mobile 0413 048 602 firstname.lastname@example.org www.minelife.com.au
Stock research is a tough game, which is why Gavin Wendt does the hard work for readers every edition in Market Watch.
est African Resources (WAF) is a highly credentialled gold exploration play that has managed to identify consistently wide zones of copper-gold mineralisation from its Sartenga prospect within its Boulsa project in Burkina Faso. One of the company’s biggest strengths is its dedicated and highly experienced exploration team, which has a long-established operational association with Africa. Over the past decade there have been a plethora of junior companies that have jumped aboard the west Africa bandwagon, driven by broker and speculative hype. WAF is not one of these companies – its managing director Richard Hyde has a strong operational track record in west Africa and understands its enduring potential. WAF has operated within Burkina Faso since 2007 and has assembled a portfolio that ranks it as the largest ASXlisted acreage holder in the country. The company’s Boulsa gold project encompasses a massive 6370sq.km landholding, which in turn hosts a whopping 200km strike length of prospective early-Proterozoic Birimian greenstone belts. The greenstones are the hugely prospective, primary goldbearing rocks within the region. The Boulsa project is situated within central Burkina Faso’s Manga-Sebba belt, a prolific geological structure that plays host to numerous gold deposits. Work by the company has so far tested 30km strike length of highly prospective Birimian greenstone belts in the southwest portion of the Boulsa project area but this represents just 15% of the overall prospective strike extent. This work has so far identified 25 robust exploration targets. In terms of the regional context, the southwest corner of the Boulsa project area lies immediately adjacent to the 3.5 million ounce gold Bombore
deposit, while the belt also extends into Niger where it hosts the 2Moz gold Samira Hill mine. The project is also bisected from southwest to northeast by the Markoye fault, which is a major crustal-scale shear zone that’s associated with a number of gold deposits, including the 1.7Moz Taparko-Bouroum deposit, the 5.3Moz Essakane deposit and the 2.65Moz Kiaka deposit. The company therefore boasts one of the most prospective exploration addresses in all of west Africa. The company also recently reported encouraging assay results from mapping and rock-chip sampling at its 100%-owned Goudré permit, which forms part of its Boulsa project. High-grade results of up to 70.63 grams per tonne gold have been returned, with most taken from quartz veining within artisanal pits, which are commonly aligned along a northeast-southwest trend. The area will be mapped in further detail and will be targeted with air core drilling following the wet season. Drilling will target oxide and transitional mineralisation in line with the company’s exploration target of defining 8-10 million tonnes of 1.2-1.4gpt gold (300,000-450,000oz gold) of oxide and transitional material by the end of 2013. The company has also embarked on a major corporate transaction involving the acquisition of Toronto Stock Exchange Venture-listed Channel Resources, owner of the adjacent Tanlouka gold project. Any significant mineralisation identified within the Goudré permit will enhance the potential economics of a low capital expenditure, heap leach operation from the combination of WAF and Channel Resources’ ground position. With respect to the acquisition itself, WAF has made a one-forfour scrip takeover bid for Channel
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Resources, which maintains a sizeable exploration portfolio in west Africa. In addition, Channel shareholders will receive one share purchase warrant (exercisable at A40c within 36 months) for every two WAF shares received in the transaction. The transaction will result in WAF issuing approximately 29.84 million shares, resulting in Channel shareholders holding 13.2% of the enlarged WAF. The transaction represents an approximate 100% premium over Channel’s pre-bid trading price. Channel shareholders during early December voted overwhelmingly in favour of the transaction, with 99.68% of all votes cast in favour of the deal. The takeover makes sense, particularly in the context of the difficult market environment, where consolidation is the name of the game and exploration funds are difficult to raise. Channel’s Tanlouka project borders WAF’s Boulsa project and is located within 10km of advanced exploration targets at WAF’s Moktedu gold prospect. Channel’s Tanlouka project has been its primary focus and the company has advanced it rapidly from initial discovery during 2010 to the publication during 2012 of a maiden resource estimate for the Mankarga 5 target. The indicated and inferred resources at Mankarga 5 comprise 30.8Mt at 1gpt gold for 1Moz gold (0.5gpt gold cut-off), which includes 10.8Mt at 1.6gpt gold for 0.54Moz gold (1gpt gold cut-off). This incorporates an inferred and indicated oxide resource of 6.3Mt at 1gpt gold for 0.2Moz (0.5gpt gold cut-off) from surface to about 50m depth. Encouragingly, WAF is maintaining strong activity at a time when many west African plays have gone off the boil or fallen off investors’ radar screens. 77
landmark deal shows rare earths pathway An extraordinary MoU with a major Chinese rare earth producer has proven that Peak Resources stands out from its peers as a genuine player in a particularly tough commodity market. Anthony Barich reports
Work on Peak Resources’ Ngualla project in Tanzania.
he memorandum of understanding that Peak Resources signed in December with a major Chinese rare earth producer for its Ngualla project in Tanzania speaks volumes about the Aussie junior’s sure footing. In a tough capital market and an even tougher rare earth (RE) space, Peak has set itself apart as a much lower-cost future producer than its competitors, with a business plan and partner that stands the company in good stead for the foreseeable future. The privately owned Chinese producer, based in a port city in northeast Jiangsu Province, has facilities and technical expertise in the beneficiation, processing and separation of rare earths into highpurity RE products and an established marketing network. Critically, the Chinese partner will work with Peak to negotiate an offtake agreement for Ngualla RE mineral concentrate, mixed carbonate or other
intermediate products. Production is still on track to start in 2016. Peak executive chairman Alastair Hunter said that while industry nay-sayers might point to the “nonbinding” nature of the MoU, it was no ordinary MoU. “This is an MoU that’s been a long time in the making,” Hunter told RESOURCESTOCKS. “We’re particularly happy as we wanted all the terms and conditions for a proper agreement put in so both parties had time to consider the implications. We believe that this goes beyond an MoU – it’s quite a clear understanding of what we plan to do. “This party are a group people with a huge amount of experience in development and production of rare earths, right through to final product. They’re not just middle men. They’re a very efficient organisation. I’ve seen their facilities. One of the major computer facilities has a handful of guys handling millions of dollars of material being processed. “The other thing that has us happy is that, if the ore goes to China (it may be processed in Tanzania), it ends up in a bond area, which means a dedicated plant will be built, but in a trade-free zone so it can be imported and re-exported and is not subject to quotas. We also think there’s a possibility that the plant would be jointly owned by us and a Chinese partner. “It’s another step in a long road. This has been tough for us – frightening in fact, with the state of the market and cynicism. Not to be condemning others, but you don’t have to be a rocket scientist to see that other much bigger competitors have been doing it very tough. So if that’s the case, why would the investment
community look at a small company like Peak? “That engenders a healthy degree of cynicism.” The key then is to distinguish the company very clearly in the eyes of the investment community that Peak’s project is different from the rest, as the fact doesn’t appear to have registered with many folk of late. “Our whole processing path shows we can do a direct sulphuric acid leach – we don’t have to bake the ore. We can produce a very pure, clean concentrate which is very low in uranium [14ppm] and thorium [42ppm], which is a big plus,” Hunter said. A critical element to assess an RE company’s prospects is the uranium and thorium content for shipment of material. Peak is one of the lowest in terms of these radioactive contaminant minerals. The rare earth carbonate Peak produces is very clean, running at about 56% RE oxide as a result of going through the acid plant, according to current modelling. This acid plant is based on sulphuric acid for processing rather than much more expensive hydrochloric acid which many of the other slated projects will use. Related to this are the costs. Peak’s much bigger competitors have spent well in excess of $1 billion each. Since discovering Ngualla just over four years ago, Peak has spent about $37 million thus far, including the purchase price of the minority party. “So we’ve been frugal,” Hunter said. “We haven’t taken short cuts or done things ‘on the cheap’, but we’ve been very measured in what we’ve done regarding costs.” Additionally, a scoping study completed in December 2012 and updated in May 2013 revealed that
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“We haven’t taken short cuts or done things ‘on the cheap’, but we’ve been very measured in what we’ve done regarding costs.” AlAstair Hunter peak resources the project has a low capital cost requirement of $US373 million (excluding contingency) with a payback period within the first three years of production. The operating cash costs are also low - $US10.18 per kg free on board (“FOB”). Peak also has excellent grade – not the highest in the world, but certainly high compared to the new crop of peers. The first 10-15 years of production at Ngualla will be +5% rare earths. “People say ‘yes, but it’s only light rare earths’, and try to make it a game of heavy vs light. That’s a big mistake,” Hunter warned. “We’re critical rare earths, some of which are heavy and light. The two critical rare earths we have are neodymium and praseodymium, which the US has designated as critical to its needs, and we have very good grades of both. That’s the key to many of these projects. “We do not see ourselves as competing with those promoting themselves as heavy rare earths projects. Ours is critical rare earths. That’s important.” The processing route is also of great importance. Most of the deposits of Peaks’ peers are monositic, which means it needs to be heated at high temperatures and cracked - a very expensive process that needs a very specialised plant. Peak doesn’t need that. It has thus far beneficiated its ore to 17.5% and its metallurgists believe it can beneficiate it further to north of 20%. “That means we’re producing a concentrate with less material having to go through the sulphuric acid plant, which lowers costs,” Hunter said. “The cost of sulphuric acid is up to a third cheaper than the other
acids that competitors must use, like hydrochloric acid.” Peak has also done what very, very few of the new crop of RE companies have been able to do: produce physical product, at ANSTO’s metallurgical laboratories in Sydney. So Peak can take high-purity (+99.9%) product anywhere and prospective off-takers can see that it is distinctly Ngualla material. “That helped secure the Chinese partner. The mere fact that Peak is the first company that’s been able to procure a Chinese company to do that speaks volumes,” Hunter added. The Chinese partner may also introduce further parties for the purpose of investment, project construction, processing, engineering studies and marketing. Investors can expect more good news in this new year, with the pre-feasibility study on track for completion in Q1, with a reserve. There is expected to be enough reserve for about 50 years’ production at 10,000tpa. The completion of a reserve estimate will be another significant milestone for Peak and will place Ngualla among a small number of rare earth development projects to have advanced to this stage. “We believe that essentially we have de-risked the project already,” Hunter said. “Everything we’ve done has been totally transparent and independently audited, and we’ve come out of it very well.” Hunter also said it was important to emphasise that Peak had taken its Ngualla project from a totally grassroots, virgin discovery to where it sat today in less than four years. “That in itself tells you something. That’s quite an amazing feat. It usually takes 10 years or upwards,” he said.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Peak Resources has signed a breakthrough MoU with a Chinese rare earths producer.
peak resources at a glance
Head Office Level 2, 46 Ord Street West Perth WA 6005 Australia Ph: +61 8 9200 5360 Fax: +61 8 9226 3831 Email: email@example.com Web: www.peakresources.com.au Directors Alastair Hunter, Dave Hammond, Jonathan Murray Market Capitalisation $A21.8 million (at press time) Quoted shares on issue 330.7 million Major Shareholders Kinetic Investment Partners 4.09% Alastair Hunter 2.74% 79
RARE EARTHS UPDATE
WORDS BY ANTHONY BARICH
TIMEFRAME IS AN ILLUSION The rare earth game has changed since one of Australia’s leading junior players predicted at the end of 2012 that the market gap would be filled by 2017.
ANY OF THE RARE earth front runners are unlikely to get their projects off the ground at exisiting prices, leaving previous estimates of when the market gap will close to be “blown out of the water”, a leading junior player says. In November 2012, Peak Resources managing director Richard Beazley told RESOURCESTOCKS that time was against the hundreds of rare earth (RE) companies who were planning to start injecting one or more of the 17 metals into the market. The wide spread of elements RE companies had often meant large capital costs of up to and over $1 billion, which had not changed. Beazley said that with such a spread, if they were not in business by the time the market gap was ﬁlled in 2017, they would ﬁnd it virtually impossible to get in as a producer because the barriers of entry would be too high.
However, Alastair Hunter, who had moved into the role of executive chairman of Peak since Beazley resigned in April, said the tide had now turned. “Richard said 2017, which was not unreasonable and very true at the time, but the game has changed in that a lot of the front runners will not get off the ground at current rare earths prices because the capital costs are too high,” Hunter said. “That’s where the metallurgical characteristics are so important. “That [2017 prediction] has been blown out of the water. “Now it’s going to come down to what your capital cost and production cost proﬁles are going to be and it’s only the few ones – and there’s some at the bottom end – that will get into production. “We’re not the only one, but we’re one of the very, very few. Rare earths is a good space to be in if you have a good project, but it is not easy. “
Making things worse for juniors are some institutional investors who appear to have stayed away from junior Australian mining stocks. “The rare earth market is very difﬁcult, but there are all sorts of junior explorers out there with great gold, copper and nickel projects who can’t get funding,” Hunter said. “To a great extent, a lot of the institutional investment community in Australia have not been particularly supportive of many junior exploration companies when they should be getting behind them and setting an example. “They’ve been very conspicuous by their silence. “I could name half a dozen smaller-scale Australian companies who have done absolutely amazing jobs with great resources, good management, they can’t get the support. We’re no different, but while the rare earths sector is tougher, the principle is still the same.”
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
Words by miningnews.net editor kristie batten
metals to remain in oversupply this year Macquarie has outlined its predicted key themes for metals in 2014, with the market tipped to remain in oversupply in the first half before conditions improve later in the year.
nalysts said that unlike the past couple of years, 2014 had opened with the developed world contributing to metals demand growth. “Certainly, there remains too much supply capacity across metals markets, which continues to provide a headwind for H1 2014, both in terms of underlying prices and also price volatility,” Macquarie said. “However, slowing mine supply growth and the continued developed world recovery offers a better fundamental outlook for H2.” And China had continued to surprise on the upside. “Historically, this type of environment has proven positive for metals prices, with core buyers and price-sensitive buyers wanting increased material at the same time,” Macquarie said. “Indeed, it could be argued certain metals have felt this benefit over recent months. “However, the lagged impact of overinvestment on the supply side means current demand moves are not aggressive enough to break the shackles of supply during 2014.” But mine supply growth was starting to slow, according to Macquarie, despite growth in 2013 across all metals. “This, coupled with a renewed focus on productivity at existing mines, means we are exiting 2013 at high single-digit levels of supply growth across many markets, plus elevated inventory levels,” analysts said. “However, we expect these growth rates to slow over the course of 2014, with sequentially fewer projects being delivered and much of the productivity rebound now in the past.” Macquarie said that trend was well-advanced in zinc but
for commodities like copper and metallurgical coal, it might emerge later this year, though the market might shift its focus towards potential deficits in 2015-16. According to Macquarie, miners will continue cost-cutting measures, with balance sheets improving across the majors. “This is historically a period of the cycle which has been dangerous for mining company managements, with the ongoing desire not to be seen as ex-growth and falling capital intensity and in some instance depreciating currencies making projects look more viable,” Macquarie said. “At the same time, however, shareholders are still focused on nearterm return strategies. “It will be interesting to assess whether companies are sticking to their cost-cutting mantra now the easy wins are complete, or whether there is increased consideration of a counter-cyclical approach to reinvest in growth projects, or even mergers and acquisitions.” Analysts expect 2014 to post a 10% year-on-year drop in capital spending. “We expect to see cash cost reduction hit a nadir around mid-year, at which point miners will have to start buying stocks and spares again, followed by increased equipment purchases towards year-end,” Macquarie said. It said the end of US stimulus measures, which was expected to wind up before the end of the year, was a relative “non-event” for metals, though gold and silver were a different story. But analysts believe platinum has better prospects than gold in 2014. “One concern many have, however, is whether platinum can ‘decouple’ from gold, especially if gold remains low or keeps falling,” Macquarie said.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“Nevertheless we don’t think gold will derail platinum in 2014.” Government action will be a key theme of 2014, according to analysts, with this year set to be the year that policies that impact metal markets reach crescendo. “The Indian government’s ongoing battle to reduce the current account deficit means regular tinkering with gold imports, an election in South Africa brings further risk of industrial action, Mongolia still hasn’t fully implemented a mining policy which makes international miners feel secure, while Chile is struggling to balance environmental pressures with new mine development, leading to falling competitiveness and a slowdown in new investment,” Macquarie said. “Meanwhile, the much talked about Indonesian ban on unprocessed ore comes into effect, though we still expect to see much to and fro on this over the course of 2014. “Add to this the added layer of currency complexity and potential intervention, and rather than weather or demand, government policy could be a key factor in 2014.” Analysts said Chinese government policy would continue to be the single largest driving force from metals balances. Macquarie is tipping downstream margins to improve, while upstream margins will be squeezed due to a focus on investment in mining rather than copper smelting or steelmaking capacity. “This is not to say that we see a bottleneck in these areas but rather that utilisation rates – particularly effective utilisation after raw material grade declines and idled capacity – will increase to a level where downstream operators have some pricing power,” Macquarie said. 81
MINES & MONEY LONDON
URBANISATION: THE SUPER-CYCLE
DRIVER Are junior miners dead in the water unless they have cash flow? If so, what is the future for greenfields exploration – the lifeblood of industry – and for the economies of the countries in which discoveries are made? Mines & Money London offered some short-term pain but longer-term optimism.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
WORDS BY ANTHONY BARICH, GARETH TREDWAY
ITHER STANDARD Bank London mining and metals head Vaughan Wickins is a philosopher, or he’s only saying what the industry knows deep down but won’t admit for fear of giving the perception it is denying reality. Except the reality has been obvious for the best part of the past two years – the retail market has all but ﬂed the mining industry. Meanwhile sophisticated and institutional investors, along with the family-owned entities out of Europe and the property developersturned-resources investors in Asia are becoming much more savvy and meticulous about where they sink their cash. While miners struggling with commodity prices is only expected to get worse this year, it’s become clear that only companies with existing
cash ﬂow – or that are close enough to it that investors can practically smell it – are likely to get funding. At Mines & Money London in Deccember, Wickins took a bigpicture view. Stating that the current super cycle started in 2000, Wickins said that during a typical 20-30 year cycle it was “perfectly normal to see consolidation and pullbacks within an upward trend”. “The trend of rising demand meeting inelastic demand is real,” he said. “I would maintain that just because you can’t see [the super-cycle effect] in front of your face every day, it doesn’t mean it doesn’t exist.” Wickins backed this up with the opinion that emerging market populations would keep growing and commodity demand would be underpinned over the next 40 years by increased urbanisation.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
“Emerging markets are set to grow at 4-5% a year – this is healthy growth,” he said. And while all the talk around Asia’s middle class has dominated the former Australian government’s “Asian Century” slogan, Wickins ominously said that Africa was set, at current growth rates, to overtake China in terms of population by 2030 – and this expanding population wanted to live in cities. He said by 2050, 70% of the world would be urbanised – up from a rate of 53% in 2013, 47% in 2000 and 30% in 1950. “Urbanisation is a growth driver. It is associated with high income and productivity levels,” he said. It is a prescient reminder, given this analysis comes out at African Mining Indaba. On the sidelines of the Mines & Money conference in London in December, Nedbank Capital
A local wooden boat full of people crosses the river Gambia from Barra to Banjul, with a commercial dock and container ship in background. Urbanisation in Africa, along with China, will drive wealth creation and commodity demand for decades to come.
mining investment banking managing director Mark Tyler told RESOURCESTOCKS’ sister publication Mining Journal that “a lot of businesses have been built on access to relatively easy equity money and it seems to have dried up now”. “I think what you’ll start to see is that only the good projects are going to get funded,” he said. Tyler, whose industry involvement spans nearly three decades, said the markets were starting to resemble the “bad old days” that preceded the boom of the past 10 years. “Lots of money went into projects that should never have been funded,” he recalled. “The share price appreciations were so good that you just had to invest and you would make money but now that’s not the case. “As the share prices have come down you have to look for value. That’s how it worked in the past.” Meanwhile, RESOURCESTOCKS’ own investigations into the London capital market revealed similar sentiments. When Britain overtakes Germany as Ferrari’s largest European market, you know things are on the up in London, which just happens to be where the global mining sector’s optimism is stemming from. Pity those good vibes won’t reach juniors any time soon. The emerging optimism coming out of London for the global mining sector is likely to be cold comfort to juniors this year, with commodity prices widely tipped to plunge further, according to mining sector intelligence firm IntierraRMG. The firm’s London-based editorial director Chris Hinde said much of the increased confidence was perversely centred in Europe, which has been causing all the economic mayhem in recent years. With China continuing to drive strong medium-term demand for steel, the US slowly pulling itself out of recession and Europe more or less out of recession, optimism abounded for the big end of town – “which is what London is good for” – whose stocks had “ risen reasonably” of late, Hinde
“I would maintain that just because you can’t see the super-cycle effect in front of your face every day, it doesn’t mean it doesn’t exist.” VAUGHAN WICKINS STANDARD BANK 84
“Quite a few people in London are saying the only way out of it is to have mergers and acquisitions – and that’s not happening because of entrepreneur vanity.” CHRIS HINDE INTIERRARMG told RESOURCESTOCKS prior to Mines & Money London 2013. He noted that the temporary halt to the long decline in metals and mineral prices was celebrated at the recent London Metals Exchange Week late last year, where users and suppliers started negotiating terms for the coming year. This mood, he said, was a useful gauge of the state of the wider mining industry, which had turned “distinctly buoyant”. However, access to capital for juniors is still non-existent and Hinde warns that “if you haven’t got cash flow already, the chances of bringing exploration projects to fruition next year is looking pretty grim”. Added to this is what appears to be a negative consensus view on commodities in 2014, best characterised by Barclays Bank’s recent declaration that “not many commodities have fundamentals that look strong enough to support a sustainable price rally”. “Tin and the platinum group metals markets are among the exceptions and we view rallies in base metals markets as opportunities to establish shorts, especially in copper,” Barclays added. The damaging extent of the prognosis for juniors is staggering considering that, according to IntierraRMG’s databases, half the global mining industry has a market capitalisation of less than $US10 million, in terms of physical numbers. “Half the industry – or up to twothirds – is in a serious mess,” Hinde told RESOURCESTOCKS from his London base. “Quite a few people here [in London] are saying the only way out of it is to have mergers and acquisitions – and that’s not happening because of entrepreneur vanity.” Hinde noted there were fewer M&A than should otherwise be the case in such a depressed market for the small end of town. He believes ego is to blame, with a 19% decline in M&A activity in Q3 2013 from the already low levels of the June quarter. “If you founded a junior and you’re beavering away, you don’t want to merge and lose your position,” Hinde said.
“These guys think that they’re ‘the answer’ and that they’re going to come good and while the only way out is probably to merge with someone who hasn’t got your projects but has got the cash, they don’t want to do it because it’s their baby. “According to the banks here [in London], there are quite a few deals that they’ve suggested between companies to amalgamate to get them out of this mess, then the founders [of the juniors] are just not interested – and the problem is vanity. “That is across the board. I don’t think it’s a particularly regional thing. “The problem is that the CEO or the founders have most of the shares so it’s difficult to do a deal without their approval. If they haven’t got the shares you get rid of them.” Perhaps unsurprisingly, emerging market (read: Asian) buyers dominated the M&A space, with nine of the top 10 deals in terms of value done by companies from China, Indonesia, Taiwan, Turkey and, from left field, South Africa. Hinde noted that the exploration sector globally suffered its worstever three-month period in Q3 2013 and though Australia and Canada dominated the financing of exploration, both had seen a sharp decline in funds raised over the past nine months. Hinde also revealed a cunning evolution of mining funding that saw funds lend debt rather than buy equity, lending more than the miners/ explorers needed to develop their project so they could pay them back with interest. “In other words, if you needed $8 million to develop your mine, they’ll lend you $10 million and they write the deal to ensure that extra $2 million is just for paying interest to the bank,” Hinde said. “So they’re pretty safe unless you go out of business completely and they’re getting a good rate of return.” He said the word around London was that Europe was finding optimism precisely because it had those economic troubles, as the only chance of getting a decent interest rate was in the mining industry, which had high risk but high returns.
JANUARY/FEBRUARY 2014 RESOURCESTOCKS
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Capital Drilling provides leading management teams, best-practice performance in health, safety and environment, highly trained operations personnel and with our fleet of the latest rigs and equipment, delivers a 360˚ perspective that our clients have come to expect from their partnership with us. Contact us to discuss how we can deliver greater value to your project or enrich your career.
23 Amoy Street, Singapore 069858 Office : +65 6227 9050 Fax : +65 6227 9089 firstname.lastname@example.org email@example.com WWW.CAPDRILL.COM