Aquila Resources is a junior resources company with three core areas of focus. Nothing unusual about that.

 

The Perth-based company has a strategy to become a serious coal miner and take advantage of the rapid growth in demand and prices for commodities feeding China's economic boom.

 

The second area of focus is gold, a business that executive chairman Tony Poli knows well, having hit the business big time through his involvement in the highly successful Eagle Mining in the1990's.

 

The third leg, though, is an unusual asset but one that has the potential to deliver Aquila and its shareholders a multi-million-dollar windfall.

 

Aquila floated three-and-a-half years ago on the mothballed Youanmi gold mine - assets Poli and his business partner Charlie Bass had picked up privately. But the gold market was tough and Poli, with a strong sharemarket following, was looking for a big bang corporate deal to elevate the company above the swag of struggling gold explorers.

 

The opportunity came in early 2001 when Aquila struck a deal to buy Pasminco's 49% stake in the big Ernest Henry copper-gold mine in Queensland for $145 million.

The purchase was funded and Aquila was ready to become a serious player.

 

But the deal fell through when Pasminco's majority partner in the mine, MIM Holdings, exercised its pre-emptive right in March 2001 after gaining an extension of time from Pasminco in contentious circumstances.

 

Aquila's legal bid for restitution from Pasminco was complicated when the lead-zinc miner plunged into administration in September that year with debts of $3 billion.

 

Believing they had a solid case, the Aquila directors pushed on and have made a $153 million damages claim (being the value of the lost opportunity to Aquila) alleging that representations made by Pasminco and its advisers to procure an extension of the pre-emption period were misleading and deceptive, in contravention of the Trade Practices Act, and amounted to a breach of contract.

 

Aquila is now pursuing its claim through the Australian Federal Court.

 

A second action is also underway, seeking orders to terminate the Deeds of Company Arrangement executed by two Pasminco subsidiaries.

 

Aquila claims Savage Resources and Savage Finance should never have been put into administration, the DOCA's were never approved by the relevant bodies of creditors and the assets and liabilities should not have been pooled with Pasminco.

 

"While it is difficult to assess the likely returns to creditors of Pasminco based on publicly available information, Aquila is of the opinion that the returns to creditors of the Savage companies will be significantly higher and accordingly, has taken legal action to protect the returns from its underlying claim against Savage should that claim be successful," Poli said.

 

Pasminco has recently been reborn as Zinifex and having re-floated after raising fresh capital of about $975 million, the administrator has a pool of cash set aside for creditors. Aquila is currently a provisional creditor until it can prove its claim in front of the Federal Court, something Poli is hopeful will be wrapped up sometime next year.

 

" There is nothing in the process up to now that has deterred us from proceeding with this claim," Poli said.

 

" In fact, what we have been able to discover from the other party through preliminary court appearances has only given us further encouragement for a positive outcome."

 

If Aquila is successful it will be treated like any other creditor and be in line for a payout.

 

While Poli is coy about numbers at this stage it is quite simple to work out any potential distribution to Aquila. Even an eventual payout of 20c in the dollar to creditors will result in a $30 million windfall for Aquila.

 

Aquila currently has a market worth of less than $35 million based on a share price of 77c and 43.9 million shares on issue.

 

However, while the litigation provides a nice potential sweetener, most investors are backing Aquila because of Poli's involvement and the resources projects.

 

After the Ernest Henry deal fell through, Aquila was keen to move on to other resources projects while still pursuing the legal action. That was when the directors started putting together a coal strategy and focused on Queensland's Bowen Basin.

 

The company now has more than 3000 square kilometres of ground and 10 project areas, all prospective for coal.

 

" It would now be almost impossible to put together that kind of ground position in the Bowen Basin," Poli said.

 

" The coal tenements are strategically located close to either existing or future operating mines enabling Aquila to exploit discoveries, utilising existing infrastructure such as transport, access and pipelines, therefore reducing up front capital and lead times."

 

Although bigger is obviously better, Poli said Aquila was realistically aiming to develop projects of about 2 million tonnes a year in size in the medium term.

 

Earlier this year Aquila brought an impressive partner into the coal strategy, the privately owned American Metals and Coal International group, a major producer, shipper and trader of coal to US, Asian and European markets.

 

AMCI can earn up to 50% in all Aquila's tenements, except Moranbah East, by free-carrying the company for $5 million in expenditure.

 

Aquila has also recently been granted exclusive rights by Anglo American-controlled South African group Kumba to explore and evaluate for shallow coal on ground adjoining the Moranbah East project.

 

Aquila has started an aggressive exploration program (part of an annual $2 million budget) and by September or October a clearer picture should emerge.

 

On the gold front Aquila has the Wilcherry Hill project, located on the northern Eyre Peninsula of South Australia. The company was also quick to capitalise on the exploration success of fellow Perth junior De Grey Mining in Western Australia's Pilbara region.

 

When De Grey started having luck Aquila pounced on the area and has been able to build about 450sq.km of tenements covering some 55 strike kilometres of a highly prospective geological trend that hosts the Indee project (494,000 ounces) and De Grey's exciting Turner River discovery.

 

Aquila is well funded to pursue both its project activities and the litigation. Late last year it raised $2.7 million by making a placement to overseas institutions at 50c each.

 

Then in the December quarter, as part of the joint venture deal with AMCI, the US company took a placement of shares at $1, well above the market, pumping $2.5 million into Aquila's kitty. The company is also sitting on an investment in a Canadian-listed junior explorer worth more than $4 million.

 

Aquila shares have been a strong performer in the past 12 months, climbing from 40c to a high of 87c. Poli readily admits, though, that the share price strength has come despite very little promotional activity by the company. He has been far too busy locking the various strategies in place to be conducting roadshows.

 

But that will change. Once the coal strategy firms and there are projects on the horizon, Poli will be keen to spread the word wide and loud.

This report, first published in the April/May 2004 edition of RESOURCESTOCKS magazine, was commissioned by Aquila Resources