Executive chairman Poli has managed to more than double the group’s market capitalisation in 12 months, despite Aquila barely scratching the surface of its valuable Queensland coal assets.
The fact that coal prices keep going higher has certainly helped Poli’s cause, as has his partnership at several mines with Vale, the Brazilian giant. With plans to become a 10 million tonnes per annum coal producer inside five years – alongside a mooted iron ore operation in WA’s West Pilbara – the company has even been touted as a possible takeover target.
The latter seems unlikely, given Poli’s 31% shareholding in Aquila (Latin for ‘eagle’). But in the mining game, you never take anything for granted, as Poli can testify. Times are good now but, since floating Aquila in 2000, Poli has endured several low points. Key among those was the company’s failed bid in 2001 to secure Pasminco’s stake in the rich Ernest Henry copper-gold mine in Queensland.
After being trumped by MIM Holdings (now Xstrata), Aquila’s shares were savaged and a long legal battle ensued. The company eventually won $14 million in a settlement with Pasminco’s administrators. It covered the legal fees but was cold comfort given the subsequent boom in copper prices that turned Ernest Henry into a treasure trove for Xstrata.
Having failed to get its hands on the copper, Poli decided to give coal a go by pegging eight claims in the Bowen and Surat Basins. At the time nobody else was interested in the leases. Coal prices were low and the commodity was perceived to be a game for the BHPs and Rio Tintos of the world.
Although the sudden switch to coal confused some investors (Poli originally made his name in gold with his previous vehicle, Eagle Mining), it proved a masterstroke of timing. With little money up front, Aquila secured a firm foothold in Queensland’s prime coal country, just as the China-driven commodities boom started heating up. Six years later coal prices are soaring as exporters struggle to supply enough of the fuel to meet raging Chinese demand.
Aquila now owns 50% of the producing Isaac Plains coal mine, and has stakes in several more large projects including the Belvedere and Peak Downs East Underground ventures. All are backed by Vale and form the guts of Aquila’s plans to become a 10Mtpa producer inside five years.
Outside of coal, Aquila is partnered by private group AMCI in the Australian Premium Iron iron ore joint venture in WA’s Pilbara. The 50:50 partners have unveiled an initial resource of 265Mt of “Yandi-type” ore near Panawonica and are assessing port and rail options.
Like coal, the price outlook for iron ore remains buoyant, with some analysts tipping a 50% hike in contract prices as went to press.
It is a sweet mix as far as investors are concerned. The stock price has quadrupled in the past two years, turning Aquila into a $1.6 billion company. “We’re in the right commodities,” is Poli’s wry comment on the company’s share market growth. “We don’t have huge cash flow, but clearly the sentiment [for coal and iron ore] is positive. And we don’t see prices coming off in the near future.”
The buoyant commodity outlook has been offset to some degree by Aquila’s failure to win a long-running court battle against AMCI, its partner at the Belvedere coal mine and the API venture. The dispute stems from AMCI’s move last year to sell most of its Australian coal assets to Vale, then known as CVRD.
In order to settle the $US660million deal, AMCI had to restructure the balance of its portfolio, with the parent entity ‘carving out’ the API and Belvedere assets into AMCI Holdings, a local company with two Australian employees. Aquila argued the deal triggered a change-of-control provision in the joint venture, giving it the right to buy the two assets from AMCI at a price determined by an independent expert.
So far, however, the courts haven’t agreed, with the Queensland Supreme Court dismissing an appeal by Aquila in December. But Poli doesn’t give up easily. After his legal team – led by prominent QC Allan Myers – reviewed the knock-back, Aquila decided to seek special leave to appeal to the High Court of Australia. In the next few months a panel of judges is expected to consider whether Aquila has a case to argue.
While the dispute with AMCI bubbles on, Poli insists that Aquila has a good operating relationship with its partner at API and Belvedere. At the latter, Vale paid Aquila US$45 million to exercise a 51% buy-in right during the December quarter and took over management of the JV. The Brazilian miner apparently rates the underground project highly as a potential 9Mtpa producer, shipping coal out of the new Wiggins Island terminal at Gladstone. Vale is preparing a pre-feasibility study work program and budget to extend the $17 million Exploration Study completed in 2007.
Another underground mine is envisaged at Peak Downs East, a 50:50 JV with Vale. The partners are pursuing a longwall operation producing around 4Mtpa of predominantly hard coking coal. A concept study has estimated operating costs in the range of $40-45 per tonne at a capital cost of roughly $620 million. Subject to securing rail and port capacity, the project will export its first coal by 2012.
The caveat for all these grand plans is, of course, infrastructure – a sticking point for many a coal mine on the east coast. “We’ll have to be patient – we can only come on stream when the infrastructure is online,” Poli told . However, he believes the Queensland Government is now “pretty proactive” on the issue and the proposed port expansions “will occur”.
At Isaac Plains, Aquila’s 50:50 joint venture with Vale, the company last month unveiled a 232% increase in the run-of-mine coal reserves. Located southeast of Moranbah in the Bowen Basin, Isaac Plains is the subject of a proposed $120 million expansion, which would more than double production to 2.8Mtpa of semi-hard, PCI and thermal coal by 2010.
At present the opencut mine is still a drain on Aquila’s funds because of development capital required. Last month the partners were relocating a second-hand BE 1370 dragline from Texas to Australia at a cost of $90 million, including refurbishment and re-erection. The machine will cut unit costs and extend mine life, Poli said, adding that Isaac Plains should generate “good earnings” from fiscal 2009-10.
On the west coast, Aquila is progressing plans to build its API iron ore business, stemming from its pegging and consolidation activities in 2004 and 2005. Aquila’s 50% stake in the venture is managed by Russell Tipper, the former managing director of the Hope Downs project prior to its inclusion in the Rio Tinto fold.
API’s initial mine plans call for a 30Mtpa operation based on a 265 million pisolite resource near Robe River’s Panawonica and Mesa A operations. Poli’s strategy is two-fold: keep finding more resources and decide on a rail and port strategy. Like every other iron ore aspirant in the state, the latter is critical.
Aquila cannot access either Cape Lambert or Dampier, both controlled by Rio Tinto. So the company’s preferred port – and closest to the deposit – is Cape Preston, site of Citic Pacific’s proposed $5.2 billion Sino Iron Magnetite Project. Aquila has been in talks with the WA Government and iron ore baron Clive Palmer, who has a state agreement at Cape Preston. However, with those talks showing little progress as of last month, a more likely fallback is Dixon Island, a potential deep water port 80km further north.
Given its big plans in iron ore and coal, Aquila may have some heavy funding requirements over the next several years. The company has around $200 million in cash and share investments but, with debt becoming more expensive and harder to come by, Poli will need to examine every alternative, including asset sales. Last August Aquila sold its coal exploration tenements in Mozambique to Riversdale Mining for $60 million. Nothing else was on the auction block last month, but Poli said that he would consider trading more assets, either wholly or partly. For instance, the company owns 100% of the Washpool and Red Hill coal projects in the Bowen Basin, and could easily sell 10-20% of each if the right deal came up.
Of course, given the amount of mergers and acquisition activity of late, Aquila itself could be snapped up by a larger coal or iron ore company. But Poli and other board members, including long-term business partner Charles Bass, own around 51%. Any takeover move would need to be friendly, and pitched high enough to tempt the two major shareholders just as they start building production.
As of last month no offers were on the table. Poli was just getting on with the business of building a home-grown iron ore and coal mining house.
