The 50/50 JV between Aquila and Brazilian giant Vale has about one billion tonnes of JORC compliant resource and is located down dip of BMA’s Peak Downs premium hard coking coal operation.
“The project is approved and going ahead,” according to the Macquarie report. “Gas drainage drilling as well as infrastructure construction (site access road, power substation) have commenced. Capex spent in FY12 was $80 million.”
Aquila’s shareprice has plunged to $3.15, but Macquarie estimates the company’s true worth is $5.60.
The next step in Eagle Downs is two years of driving drifts, a year of finishing major infrastructure and finally installing a longwall.
The capex of about $1.3 billion remains to be funded but Aquila is currently investigating project financing.
Aquila now expects initial longwall production to commence between late 2015 and early 2016.
“We model first coal in 2016, with an 18 month ramp-up to full production,” Macquarie said.
“However, there is not a clear infrastructure solution yet. Eagle Downs had an option for Abbott Point that Aquila wanted to exercise but Vale refused to. Aquila subsequently sued and this case is still in the courts.”
Managements of the two companies anticipate a resolution of this dispute within the next few months, according to Macquarie.
“Vale’s end game provides opportunity either way. Interestingly, the JV agreement stipulates that each JV partner can be bought out at a 50% discount to market value if they don’t act in the best interests of the JV.
“Vale had previously sought to buy out Aquila at a 50% discount, as per the JV agreement. However, since Vale did not invoke its pre-emptive right on Isaac Plains, it is unclear whether Vale has changed strategy and is now seeking to reduce its exposure to Australian coal or whether it is refocusing on hard coking coal a la Eagle Downs.
“If the former, an opportunity for Aquila to gain control of Eagle Downs could arise. If the latter, an opportunity to monetise its stake by virtue of a sell down to Vale could arise.”
