For personal use only Aquila Resources TARGET’S STATEMENT
This Target’s Statement has been issued by Aquila Resources Limited (ABN 81 092 002 769) in response to the joint off-market cash takeover bid made by Baosteel Resources Australia Pty Ltd (ABN 66 154 815 362) and Aurizon Operations Limited (ABN 47 564 947 264).
ACCEPT the Offer in due course, in the
absence of a superior proposal For personal use only use personal For
Your Independent Directors unanimously recommend that you accept the Offer in due course, in the absence of a superior proposal.
THIS IS AN IMPORTANT DOCUMENT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN ANY DOUBT ABOUT HOW TO DEAL WITH THIS DOCUMENT, YOU SHOULD CONSULT YOUR FINANCIAL, LEGAL OR OTHER Financial Adviser Legal Adviser PROFESSIONAL ADVISER IMMEDIATELY. i
Important notices
Nature of this document constitute a violation of applicable laws or regulations. This This document is a target’s statement issued by Aquila Resources Target’s Statement has been prepared solely in accordance with Limited under Part 6.5 of the Corporations Act in response to the Australian law. Offer made pursuant to the Bidders’ Statement dated 14 May Maps and diagrams 2014, which was served on Aquila by the Bidders on that date. Any diagrams, charts, graphs and tables appearing in this Target’s You should read this Target’s Statement in its entirety. Statement are illustrative only and may not be drawn to scale. Defined terms Unless otherwise stated, all data contained in diagrams, charts, maps, graphs and tables is based on information available as at A number of defined terms are used in this Target’s Statement. the date of this Target’s Statement. These terms are explained in the glossary in Section 8. In addition, unless the contrary intention appears or the context Privacy requires otherwise, words and phrases used in this Target’s Aquila has collected your information from the register of Aquila Statement have the same meaning and interpretation as in the Shareholders for the purpose of providing you with this Target’s Corporations Act. Statement. The type of information Aquila has collected about you No account of personal circumstances includes your name, contact details and information about your shareholding in Aquila. Without this information, Aquila would be This Target’s Statement does not take into account the individual hindered in its ability to issue this Target’s Statement. The investment objectives, financial or tax situation or particular needs Corporations Act requires the names and addresses of Aquila of each Aquila Shareholder. Your Independent Directors Shareholders to be held in a public register. Your information may encourage you to seek independent financial and taxation advice be disclosed on a confidential basis to Aquila’s related bodies before making a decision whether or not to accept the Offer. corporate and external service providers (such as Aquila’s share Disclaimer regarding forward looking statements registry and print and mail service providers) and may be required This Target’s Statement contains forward looking statements. You to be disclosed to regulators such as ASIC and the ASX. should be aware that such statements are only predictions and are Disclaimer as to information subject to inherent risks and uncertainties. Those risks and The information on each Bidder contained in this Target’s uncertainties include factors and risks specific to the industry in Statement has been prepared by Aquila using publicly available which the Aquila Group operates as well as general economic information. The information in this Target's Statement concerning conditions and conditions in the financial markets. Actual events each Bidder has not been independently verified by Aquila. or results may differ materially from the events or results Accordingly, Aquila does not, subject to the Corporations Act and expressed or implied in any forward looking statement and such general law, make any representation or warranty (express or deviations are both normal and to be expected. None of the Aquila implied) as to the accuracy or completeness of such information. Group, any of its officers or employees, any person named in this Target’s Statement with their consent or any person involved in the ASIC and ASX disclaimer preparation of this Target’s Statement makes any representation or A copy of this Target’s Statement has been lodged with ASIC and warranty (either express or implied) as to the accuracy or likelihood sent to the ASX. None of ASIC, ASX or any of their respective of fulfilment of any forward looking statement, or any events or officers takes any responsibility for the content of this Target’s results expressed or implied in any forward looking statement, Statement. except to the extent required by law. You are cautioned not to Aquila Shareholder Information Line place undue reliance on any forward looking statement. Aquila has established the Shareholder Information Line which The forward looking statements in this Target’s Statement reflect Aquila Shareholders should call if they have any queries in relation views held only as at the date of this Target’s Statement. to the Offer. The telephone number for the Shareholder JORC Information Line is: Unless otherwise stated, the information in this Target’s Statement • 1800 992 673 (Toll Free for calls within Australia); or has been prepared and disclosed in accordance with JORC Code • +61 1800 992 673 (for callers outside Australia), 2004 and has not been updated to comply with JORC Code 2012 on the basis the information has not materially changed since it which is available Monday to Friday between 6.30am and 5.30pm was last reported. All references to reserves and resources are (WST). stated on a 100% basis, irrespective of the Aquila Group’s Further information relating to the Offer can be obtained from ownership interest, unless otherwise stated. Aquila’s website at www.aquilaresources.com.au. Foreign jurisdictions The release, publication or distribution of this Target’s Statement in jurisdictions other than Australia may be restricted by law or regulation in such other jurisdictions and persons who come into possession of it should seek advice on and observe any such restrictions. Any failure to comply with such restrictions may
Key dates Date of Offer 6 June 2014
For personal use only use personal For Date of this Target’s Statement 20 June 2014 Notice of Status of Conditions (see Section 5.3) 3 July 2014 Indicative period in which the Independent Directors advise you should accept the Offer 4 July 2014 - 5.00pm (WST) on 11 July 2014
Close of Offer Period (unless withdrawn or extended) 5.00pm (WST) on 11 July 2014
Target’s Statement i
Aquila Resources Limited | Target’s Statement ii
Table of contents
Chairman’s letter 1
REASONS TO ACCEPT THE OFFER, IN THE ABSENCE OF A SUPERIOR PROPOSAL 3
1 Frequently asked questions 4
2 Reasons to ACCEPT the Offer, in the absence of a superior proposal 8
3 Independent Directors’ recommendation 11
4 Steps to be taken as an Aquila Shareholder 12
5 Information about the Offer and other important issues 13
6 Important matters for Aquila Shareholders to consider 18
7 Additional information 26
8 Glossary 33
Annexure A Independent Expert’s Report
Annexure B Taxation Report
Annexure C Key Announcements
Annexure D Reserves and Resources
For personal use only use personal For
Target’s Statement ii
Aquila Resources Limited | Target’s Statement 01
Chairman’s letter
20 June 2014
Dear Fellow Aquila Shareholder
IN THE ABSENCE OF A SUPERIOR PROPOSAL YOU SHOULD ACCEPT THE BAOSTEEL AND AURIZON TAKEOVER OFFER IN DUE COURSE. HOWEVER, YOU SHOULD READ ALL OF THIS TARGET’S STATEMENT FOR OTHER IMPORTANT INFORMATION. You should have recently received a Bidders’ Statement from Baosteel Resources Australia Pty Ltd and Aurizon Operations Limited (together, the Bidders) outlining their joint off-market cash takeover offer (Offer) for your shares in Aquila Resources Limited. The Bidders are offering $3.40 cash for every share in Aquila that the Bidders (and their respective associates) do not already own (Offer Price). On 13 June 2014, the Bidders announced that they will not increase the Offer Price, and that they will not extend the Offer Period1, which is scheduled to close at 5.00pm (WST) on 11 July 2014. The Aquila Board established an Independent Board Committee to consider the Offer, comprising: myself, Mr Tony Poli; Mr Gordon Galt; Mr Stephen Scudamore; Mr Timothy Netscher; and Ms Denise Goldsworthy (together, the Independent Directors). Mr Zhaoming Lu is a senior executive within the group of companies controlled by Baosteel Group, and is not considered to be independent of the Bidders for the purposes of the Offer. Your Independent Directors unanimously recommend that Aquila Shareholders ACCEPT the Offer in due course, in the absence of a superior proposal. Your Independent Directors believe that their recommendation to accept the Offer in the absence of a superior proposal is finely balanced. The Aquila Group has an attractive and diversified portfolio of assets, and your Independent Directors believe that the Offer Price does not reflect the full underlying value of the Aquila Group nor the strategic value of West Pilbara Iron to the Bidders. The Independent Expert has assessed that the value of Aquila on a 100% controlling interest basis ranges from $3.90 to $5.24 per Aquila Share.2 However, on balance, after careful consideration of the Offer and the factors set out below, your Independent Directors have recommended unanimously that it is in your best interests to accept the Offer in due course, in the absence of a superior proposal. While your Independent Directors consider that no superior proposal has emerged as at the date of this Target’s Statement, it is possible that a third party or parties may make a superior proposal. In this regard, your Independent Directors note that on 16 June 2014, Aquila received a proposal from Mineral Resources, which contemplated a conditional off-market takeover offer for Aquila, with the consideration to consist solely of shares in Mineral Resources at a value equivalent to $3.75 for each Aquila Share. Aquila had discussions with Mineral Resources concerning this proposal with a view to agreeing a recommended offer. Aquila and Mineral Resources were not able to agree terms that were acceptable to both parties. As at the date of this Target’s Statement, discussions between Aquila and Mineral Resources have ceased. Notwithstanding this, if you accept the Offer early, subject to certain limited withdrawal rights, you are likely to lose your right to deal with your Aquila Shares while the Offer remains open. This may prevent you from accepting any superior proposal from a third party, if one were to emerge.
For personal use only use personal For
1 Unless all remaining conditions of the Offer are fulfilled or freed and subject to automatic extension under the Corporations Act. 2 The Independent Expert’s Report is an important document and contains a detailed independent assessment of the Offer and the assets of the Aquila Group. I encourage you to carefully review that report and the material assumptions and qualifications that underlie the conclusion of the Independent Expert.
Target’s Statement 1
Aquila Resources Limited | Target’s Statement 02
For this reason, your Independent Directors advise that you should delay your acceptance of the Offer until 3 July 2014. After that time, you should accept the Offer as soon as possible to ensure that your acceptance is received (if by mail, in Melbourne) before the close of the Offer. The Offer isFor currently this reason, scheduled your Independent to close at 5.00pm Directors (WST) advise on that11 July you 2014 should (unless delay withdrawn your acceptance or extended). of the Offer until 3 July 2014. After that time, you should accept the Offer as soon as possible to ensure Subject to the timing issues raised above, your Independent Directors believe the following are the that your acceptance is received (if by mail, in Melbourne) before the close of the Offer. The Offer reasons why you should ACCEPT the Offer in the absence of a superior proposal (each of which is is currently scheduled to close at 5.00pm (WST) on 11 July 2014 (unless withdrawn or extended). discussed in more detail in Section 2 of this Target’s Statement). Subject to the timing issues raised above, your Independent Directors believe the following are the 1. While the Independent Expert has concluded that the Offer is not fair, the Independent Expert has reasons why you should ACCEPT the Offer in the absence of a superior proposal (each of which is also concluded that it is reasonable. discussed in more detail in Section 2 of this Target’s Statement). 2. The trading price of Aquila Shares is likely to fall if the Offer is unsuccessful and in the absence of a 1. Whilesuperior the proposal Independent. Expert has concluded that the Offer is not fair, the Independent Expert has also concluded that it is reasonable. 3. The Bidders are bound by their announced statement that they will not increase the Offer Price or 2. Theextend trading the Offer price Period of Aquila (except Shares in certainis likely limited to fall ifcircumstances) the Offer is unsuccessful. and in the absence of a superior proposal. 4. No superior proposal has emerged as at the date of this Target’s Statement. 3. The Bidders are bound by their announced statement that they will not increase the Offer Price or You shouldextend alsothe Offer be aware Period that (except I, Tony in Poli,certain have limited a relevant circumstances) interest in. approximately 28.92% of issued Aquila Shares and currently intend to accept the Offer in due course, in the absence of a superior 4. No superior proposal has emerged as at the date of this Target’s Statement. proposal, which, when combined with the 21.89% that the Bidders already hold3, means control of Aquila willYou almost should certainly also be awarepass to that the I, Bidders. Tony Poli, However, have a Irelevant reserve interestthe right in to approximately revisit this. 28.92% of issued Aquila Shares and currently intend to accept the Offer in due course, in the absence of a superior I encourage you to read this Target’s Statement in its entirety. It sets out your Independent Directors’ proposal, which, when combined with the 21.89% that the Bidders already hold3, means control of Aquila formal response to the Offer and the reasons for your Independent Directors’ unanimous will almost certainly pass to the Bidders. However, I reserve the right to revisit this. recommendation. To accept the Offer, you should follow the instructions in the Bidders’ Statement. I encourage you to read this Target’s Statement in its entirety. It sets out your Independent Directors’ Ultimately, your decision with respect to the Offer will depend on your financial investment profile, formal response to the Offer and the reasons for your Independent Directors’ unanimous circumstances and risk profile. Accordingly, your Independent Directors encourage you to read this recommendation. To accept the Offer, you should follow the instructions in the Bidders’ Statement. Target’s Statement having regard to your own circumstances. You should consider the Independent Ultimately,Directors’ reasons your decision for their with recommendation, respect to the Offer including will depend the risk on factors your financialwhich are investment set out in thisprofile, Target ’s circumstancesStatement, and and if you risk are profile. in any Accordingly, doubt as to yourthe action Independent that you Directors should take encourag in relatione you to to the read Offer this, you Target’sshould consult Statement a professional having regard adviser. to your own circumstances. You should consider the Independent Directors’ reasons for their recommendation, including the risk factors which are set out in this Target’s Your Independent Directors will continue to keep you updated on any material developments as they Statement, and if you are in any doubt as to the action that you should take in relation to the Offer, you occur. In the meantime, if you have any queries in relation to the Offer, please contact the Shareholder should consult a professional adviser. Information Line on 1800 992 673 (Toll Free for calls within Australia) or +61 1800 992 673 (callers Youroutside Independent Australia). Directors will continue to keep you updated on any material developments as they occur. In the meantime, if you have any queries in relation to the Offer, please contact the Shareholder Yours sincerely Information Line on 1800 992 673 (Toll Free for calls within Australia) or +61 1800 992 673 (callers outside Australia). Yours sincerely Tony Poli Executive Chairman and Chief Executive Officer Aquila Resources Limited Tony Poli Executive Chairman and Chief Executive Officer
Aquila Resources Limited For personal use only use personal For
3 As at 19 June 2014, the Bidders had a relevant interest in 21.89% of Aquila Shares (see announcement by Aurizon Holdings dated 19 June 2014).
3 As at 19 June 2014, the BiddersTarget’s had Statement a relevant interest in 21.89% of Aquila Shares (see announcement by Aurizon Holdings dated 2
19 June 2014).
Target’s Statement 2 Aquila Resources Limited | Target’s Statement
03
REASONS TO ACCEPT THE OFFER, IN THE ABSENCE OF A SUPERIOR PROPOSAL
Your Independent Directors unanimously recommend that you ACCEPT the Offer in due course, in the absence of a superior proposal, for the following reasons.
1. THE INDEPENDENT EXPERT HAS CONCLUDED THAT THE OFFER IS NOT FAIR BUT THAT IT IS REASONABLE.
2. THE TRADING PRICE OF AQUILA SHARES IS LIKELY TO FALL IF THE OFFER IS UNSUCCESSFUL AND IN THE ABSENCE OF A SUPERIOR PROPOSAL.
3. THE BIDDERS ARE BOUND BY THEIR ANNOUNCED STATEMENT THAT THEY WILL NOT INCREASE THE OFFER PRICE OR EXTEND THE OFFER PERIOD (EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES).
4. NO SUPERIOR PROPOSAL HAS EMERGED AS AT THE DATE OF THIS TARGET’S STATEMENT.
For personal use only use personal For
Target’s Statement 3
Aquila Resources Limited | Target’s Statement 04
1 Frequently asked questions
This Section 1 answers some commonly asked questions about the Offer. It is not intended to address all relevant issues for Aquila Shareholders. This section should be read together with the rest of this Target’s Statement.
What are the Bidders The Bidders are jointly offering $3.40 cash for each Aquila Share you hold. On offering for my Aquila 13 June 2014, the Bidders announced that they will not increase the Offer Price. Shares?
What choices do I Your Independent Directors unanimously recommend you ACCEPT the Offer in have as an Aquila due course, in the absence of a superior proposal. However, as an Aquila Shareholder? Shareholder, you have the choice to: • ACCEPT the Offer for all of your Aquila Shares; • sell your Aquila Shares on the ASX (or any other trading platform), which may be at a higher or lower price than the Offer Price; or • do nothing if you wish to reject the Offer.
You should carefully consider the Independent Directors’ recommendation and other important issues set out in this Target’s Statement.
What do the Each Independent Director recommends that you ACCEPT the Offer in due Independent Directors course, in the absence of a superior proposal. recommend? The reasons why the Independent Directors unanimously recommend you ACCEPT the Offer, in the absence of a superior proposal, are detailed in Section 2.
What are the Mr Tony Poli, the Executive Chairman of Aquila, has a relevant interest in Independent Directors approximately 28.92% of the issued Aquila Shares. doing in respect of Mr Poli currently intends to ACCEPT the Offer in relation to the Aquila Shares in their own Aquila which he has a relevant interest, in the absence of a superior proposal. He Shares? reserves the right to revisit this. The remaining Independent Directors do not hold any Aquila Shares.
When do the If you do not accept the Offer before the closing date (currently 5.00pm (WST) Independent Directors on 11 July 2014), you will not be entitled to the benefits of the Offer. advise I should However, given the current level of uncertainty in relation to the Conditions and ACCEPT the Offer? the possibility of a superior proposal, the Independent Directors advise that you should delay your acceptance of the Offer until 3 July 2014. After that time, you should ACCEPT the Offer as soon as possible to ensure that your acceptance is received (if by mail, in Melbourne) before the closing date of the Offer.
How do I ACCEPT the Details of how to accept the Offer are set out in section 12.3 of the Bidders’ Offer? Statement. You should read this section carefully as soon as possible to ensure
you are ready to ACCEPT the Offer. For personal use only use personal For
Target’s Statement 4
Aquila Resources Limited | Target’s Statement 05
What does the Aquila engaged Grant Samuel to opine on whether the Offer is fair and Independent Expert reasonable and to prepare an Independent Expert’s Report on the Offer for say? Aquila Shareholders. The Independent Expert has concluded that the Offer is not fair but that it is reasonable. The Independent Expert’s Report accompanies this Target’s Statement as Annexure A. A summary of the key findings of the Independent Expert is included in Section 2. The Independent Expert’s Report is an important document and contains a detailed independent assessment of the Offer and the assets of the Aquila Group. You are encouraged to carefully review that report and the material assumptions and qualifications that underlie the conclusion of the Independent Expert.
When does the Offer The Offer will close at 5.00pm (WST) on 11 July 2014, unless it is extended or close? withdrawn. See Section 5.5 for further details of the circumstances in which the Offer Period may be extended.
Can I accept the Offer No. You cannot accept the Offer for only some of your Aquila Shares. You may for only some of my only accept the Offer for all of your Aquila Shares. Aquila Shares?
Will the Bidders No. The Bidders have declared the Offer to be final. Accordingly, under ASIC’s increase their Offer? “truth in takeovers” policy, the Bidders are not able to increase the Offer Price.
Will a superior If you accept the Offer, you are only able to withdraw your acceptance in limited proposal be made by a circumstances. Accordingly, if you accept the Offer, you may not be able to third party for my accept any superior proposal from a third party, should one emerge. Aquila Shares? The potential remains for Aquila to receive a proposal that the Independent Directors consider to be superior to the Offer. However, as at the date of this Target’s Statement, no superior proposal has been received by Aquila.
What are the The Offer is currently subject to Conditions. The key Conditions (in summary conditions to the form) include the following: Offer? • the Bidders and their respective associates acquiring a relevant interest in at least 50% of Aquila Shares (on a fully diluted basis); • each member of the Aquila Group conducting its business in the ordinary course; • there is no material adverse change in relation to the Aquila Group; • no grant of exclusivity or arrangements in relation to infrastructure development or services for the Aquila Group or the API JV; and • no action which results in any diminution in the rights granted to the Aquila
Group under any mineral tenement. For personal use only use personal For The Conditions are set out in full in section 12.7 of the Bidders’ Statement.
Target’s Statement 5
Aquila Resources Limited | Target’s Statement 06
What are the If you accept the Offer, you will, subject to your right to withdraw your consequences of acceptance of the Offer in certain limited circumstances, limit your right to sell accepting the Offer your Aquila Shares on the ASX (or any other trading platform) or otherwise deal now? with your Aquila Shares.
If I accept the Offer, Generally no. On 13 June 2014, the Bidders announced that they will not extend can I withdraw my the Offer Period (subject to any automatic extension under the Corporations acceptance? Act), unless all remaining Conditions are fulfilled or freed by them prior to that time. As such, it appears unlikely, based upon information available as at the date of this Target’s Statement, that circumstances allowing a right to withdraw will arise. You should refer to sections 12.5 and 12.6 of the Bidders’ Statement for details of the effect of acceptance.
What happens if I If the Conditions are not fulfilled or freed before the end of the Offer Period, the accept the Offer and Offer will lapse and your acceptance of the Offer will be void and of no effect the Conditions are not whatsoever. fulfilled or freed? In such circumstances, acceptances will be cancelled, consideration payable to you for your Aquila Shares will not be paid to you and you will continue to own your Aquila Shares.
What happens if the If you have accepted the Offer and each Condition is fulfilled or freed, then the Conditions are fulfilled Offer will become unconditional and you will receive the Offer Price from the or freed? Bidders in accordance with section 12.9 of the Bidders’ Statement.
How will I know when The Bidders are required to inform Aquila Shareholders as soon as any the Offer is Conditions are fulfilled or freed. unconditional? Notices from the Bidders will be available on the ASX website (www.asx.com.au) (ASX Code: AQA).
When will I receive the If you accept the Offer, you will have to wait for the Offer to become Offer Price if I accept unconditional before you will receive the Offer Price from the Bidders. the Offer? You will receive the Offer Price 21 days after the date of your acceptance of the Offer or, if the Offer is subject to a Condition when you accept the Offer, 21 days after the contract arising from your acceptance of the Offer becomes unconditional. See Section 5.13 for further information about when you will receive the Offer Price.
Can I be forced to sell You cannot be forced to sell your Aquila Shares unless the Bidders are legally my Aquila Shares? entitled to proceed to compulsory acquisition of Aquila Shares. The Bidders will need to acquire at least 90% of Aquila Shares (under the Offer or otherwise) in order to exercise compulsory acquisition rights. If the Bidders acquire more than 90% of Aquila Shares and proceed to compulsory acquisition, then you will be paid the same consideration for your Aquila Shares that you would have received under the Offer but it will take For personal use only use personal For longer for you to receive payment.
Target’s Statement 6
Aquila Resources Limited | Target’s Statement 07
Can I sell my Aquila You can sell your Aquila Shares on market unless you have accepted the Offer Shares on market? in respect of your Aquila Shares (and have not validly withdrawn your acceptance). If you sell your Aquila Shares on market: • you will not benefit from any possible increase in the value of Aquila Shares; and
• you will not benefit from any superior proposal, should one emerge.
As at 19 June 2014, being the last Business Day before this Target’s Statement was printed, the closing price of Aquila Shares on ASX was $3.38, which represents a 0.6% discount to the Offer Price.
What are the tax A general outline of the tax implications for certain Australian resident Aquila implications of Shareholders of accepting the Offer is set out in the taxation report provided by accepting the Offer? Ernst & Young, which is included in Annexure B of this Target’s Statement and referred to in Section 5.14. As the outline is general in nature only and does not take into account your individual circumstances, you are encouraged to seek your own specific professional advice as to the taxation implications applicable to your circumstances.
What if I hold Aquila The Offer extends to Aquila Shares issued between the Record Date and the Performance Rights, end of the Offer Period as a result of the exercise or vesting of Aquila Aquila Options or Performance Rights, Aquila Options and Aquila Share Appreciation Rights that Aquila Share exist as at the Record Date. Appreciation Rights? If you hold Aquila Performance Rights, Aquila Options or Aquila Share Appreciation Rights which have vested (or will vest during the Offer Period) or
are able to be exercised and you wish to accept the Offer, you must ensure that your Aquila Performance Rights, Aquila Options or Aquila Share Appreciation Rights (as the case may be) are exercised or vest in sufficient time to allow you to be issued with Aquila Shares before the end of the Offer Period. You should obtain your own taxation advice before taking any action in regard to your Aquila Performance Rights, Aquila Options or Aquila Share Appreciation Rights.
What if I have further You should contact your legal, financial, taxation or other professional adviser. questions? If you have questions about the Offer or this Target’s Statement, please call the Shareholder Information Line on 1800 992 673 (Toll Free for calls within Australia) or +61 1800 992 673 (for callers outside Australia) Monday to Friday between 6.30am and 5.30pm (WST). Announcements made to the ASX by Aquila and other information relating to the Offer can be obtained from the ASX website at www.asx.com.au (ASX Code: AQA).
For personal use only use personal For
Target’s Statement 7
Aquila Resources Limited | Target’s Statement 8 2 Reasons to ACCEPT the Offer, in the absence of a superior proposal
Your Independent Directors unanimously recommend that you ACCEPT the Offer in due course, in the absence of a superior proposal, for the following reasons.
1. THE INDEPENDENT EXPERT HAS CONCLUDED THAT THE OFFER IS NOT FAIR BUT THAT IT IS REASONABLE
• Your Independent Directors commissioned Grant Samuel as independent expert to undertake an independent assessment of the Offer. • The Independent Expert has concluded that the Offer is NOT FAIR BUT THAT IT IS REASONABLE. • The Independent Expert has assessed that the value of Aquila on a 100% controlling interest basis ranges from $3.90 to $5.24 per Aquila Share. • The Offer is 12.8% below the low point and 35.1% below the high point of the Independent Expert’s assessed value of Aquila, being $3.90 and $5.24 respectively per Aquila Share on a 100% controlling interest basis. On this basis, the Independent Expert has concluded that the Offer is not fair. • However, on balance, the Independent Expert has concluded that in the absence of an alternative superior proposal, Aquila Shareholders are likely to be better off if they accept the Offer. On this basis, in the Independent Expert’s opinion, the Offer is reasonable. In reaching this conclusion, the Independent Expert made the following comments. - In relation to the Offer Price: “Aquila shares were trading at levels well below the Offer Price immediately before the Offer was announced. The Offer Price represents a significant premium.” - In relation to Aquila’s funding prospects: “Without the involvement of a major industry participant with substantial funding capacity, Aquila does not have a clear path forward to the financing and development of West Pilbara and does not have the financial and other resources to concurrently progress its other pre-development assets. In this context, given current market conditions, it is to be expected that the share market will not attribute meaningful value to Aquila’s pre-development assets.” - In relation to recent market conditions: “The Aquila share price fell sharply when the Bidders announced that they would not increase the Offer Price. The risk of a further fall in the share price in the absence of the Offer is exacerbated by the recent weakness in the iron ore market, with the benchmark iron ore price having fallen by around 15% since the announcement of the Offer.” - In relation to the Bidders’ prospects of gaining control: “Mr Tony Poli, Aquila’s executive chairman, has flagged his intention to accept the Offer in respect of his 28.92% shareholding (in the absence of a superior proposal). Together with Baosteel’s existing shareholding, this would give the Bidders a shareholding of almost 49% of Aquila and effective control.” • In the absence of a superior proposal, your Independent Directors agree with the conclusions of the Independent Expert. • The Independent Expert’s Report is an important document and contains a detailed independent assessment of the Offer and the assets of the Aquila Group. Aquila Shareholders are encouraged to For personal use only use personal For carefully review that report and the material assumptions and qualifications that underlie the conclusion of the Independent Expert.
Target’s Statement 8
Aquila Resources Limited | Target’s Statement 9
2. THE TRADING PRICE OF AQUILA SHARES IS LIKELY TO FALL IF THE OFFER IS UNSUCCESSFUL AND IN THE ABSENCE OF A SUPERIOR PROPOSAL
• Your Independent Directors believe that if the Offer is not successful and no superior proposal emerges, the trading price of Aquila Shares is likely to be lower than the Offer Price. - The Aquila Share price increased by 36.3% following the announcement of the Offer on 5 May 2014. The Offer Price represents a 32.3% premium to the VWAP 4 for Aquila Shares for the three months prior to the announcement of the Offer on 5 May 2014, being $2.57. - Since the announcement of the Offer, the iron ore price has declined by 14.75%, which appears to have had a negative impact on the price at which ASX listed iron ore companies are trading. - There are inherent risks in delivering on the development of the Aquila Group’s asset portfolio. Notwithstanding the Aquila Group’s cash position, with both West Pilbara Iron and Eagle Downs being potentially significant bulk commodity mining operations, and West Pilbara Iron requiring significant greenfield rail and port infrastructure, the Aquila Group’s capacity to develop these projects depends on its ability to put significant funding solutions in place for its respective share of funding for each of these significant projects. • The Offer has a 50% minimum acceptance Condition. If the Bidders acquire between 50% and 90% of Aquila Shares, you will be a minority shareholder in Aquila. This has a number of potential implications as set out in Section 5.11. In these circumstances, your Independent Directors are conscious that liquidity of trading may be reduced and believe that this is likely to result in the trading price of Aquila Shares being lower than the Offer Price.
3. THE BIDDERS ARE BOUND BY THEIR ANNOUNCED STATEMENT THAT THEY WILL NOT INCREASE THE OFFER PRICE OR EXTEND THE OFFER PERIOD (EXCEPT IN CERTAIN LIMITED CIRCUMSTANCES)
• On 13 June 2014, the Bidders stated that they will not increase the Offer Price. • On the same date, the Bidders stated that they will not extend the Offer Period, unless all the Conditions (set out in section 12.7 of the Bidders’ Statement) are fulfilled or freed prior to that time (and subject to any automatic extension under the Corporations Act). • The effect of these statements is that: - the Bidders will, in no circumstances under this Offer, be able to increase the Offer Price above $3.40 per Aquila Share under ASIC’s “truth in takeovers” policy, including if a superior proposal emerges; and - unless the Conditions are fulfilled or freed or there is an automatic extension under the Corporations Act, the Offer will not continue beyond the current scheduled close of 5.00pm (WST) on 11 July
2014. For personal use only use personal For
4 VWAP is calculated on the basis of ASX and Chi-X trading data and off-market special crossings sourced from IRESS (without its consent as to the use of the data, as permitted by ASIC CO 07/429). 5 USD basis, China benchmark iron ore price (62% Fe, CFR Tianjin), as at 18 June 2014.
Target’s Statement 9
Aquila Resources Limited | Target’s Statement 10
• In these circumstances it is likely that, if a superior proposal does not emerge and the Offer is not successful, Aquila Shareholders would lose the ability to receive $3.40 cash per Aquila Share under the Offer at 5.00pm (WST) on 11 July 2014. • Your Independent Directors advise that you should delay your acceptance of the Offer until 3 July 2014. After that time, you should ACCEPT the Offer as soon as possible to ensure that your acceptance is received (if by mail, in Melbourne) before the closing date for the Offer.
4. NO SUPERIOR PROPOSAL HAS EMERGED AS AT THE DATE OF THIS TARGET’S STATEMENT
• As at the date of this Target’s Statement, no proposal has emerged that your Independent Directors consider to be superior to the Offer. However, there remains the possibility that a third party may make a superior proposal prior to the close of the Offer Period. - Despite the Bidders’ view that their current 21.89% holding of Aquila Shares6 makes the potential for a counter-bidder low, there are examples of prior situations where a counter-bidder has emerged and lodged a superior offer despite an initial bidder already having a 20% stake. - On 16 June 2014, Aquila received a proposal from Mineral Resources, which contemplated a conditional off-market takeover offer for Aquila, with the consideration to consist solely of shares in Mineral Resources at a value equivalent to $3.75 for each Aquila Share. Aquila had discussions with Mineral Resources concerning this proposal with a view to agreeing a recommended offer. Aquila and Mineral Resources were not able to agree terms that were acceptable to both parties. As at the date of this Target’s Statement, discussions between Aquila and Mineral Resources have ceased. - The top three substantial shareholders and their associates (outside of interests held by the Bidders) control approximately 53% of the issued capital of Aquila and could, if an offer was acceptable to each of those shareholders, deliver control of Aquila. Mr Tony Poli has a relevant interest in approximately 28.92% of issued Aquila Shares and currently intends to accept the Offer in the absence of a superior proposal, which indicates that he is also likely to accept a superior proposal (should one emerge). He reserves his right to revisit this. • If you accept the Offer early, subject to certain limited withdrawal rights, you are likely to lose your right to deal with your Aquila Shares while the Offer remains open. This may prevent you from accepting any superior offer from a third party, if one should emerge. • For this reason, your Independent Directors advise that Aquila Shareholders should delay their acceptance of the Offer until 3 July 2014. After that time, Aquila Shareholders should accept the Offer as soon as possible to ensure that their acceptance is received by the close of the Offer, noting that if acceptances are mailed they will need to be received in Melbourne before the close of the Offer. The Offer is currently scheduled to close at 5.00pm (WST) on 11 July 2014 (unless withdrawn or extended). • Your Independent Directors will consider any alternative proposal in order to maximise value for Aquila Shareholders. As at the date of this Target’s Statement, the Aquila Group has not entered into any
arrangements that would prevent your Independent Directors from considering alternative proposals. For personal use only use personal For
6 As at 19 June 2014, the Bidders had a relevant interest in 21.89% of Aquila Shares (see announcement by Aurizon Holdings dated 19 June 2014).
Target’s Statement 10
Aquila Resources Limited | Target’s Statement 11 3 Independent Directors’ recommendation
3.1 Directors of Aquila The directors of Aquila as at the date of this Target’s Statement are: • Tony Poli; • Gordon Galt; • Steve Scudamore; • Zhaoming Lu; • Tim Netscher; and • Denise Goldsworthy. The Independent Board Committee formed to consider the Offer consists of Tony Poli (Chairman), Gordon Galt, Stephen Scudamore, Timothy Netscher and Denise Goldsworthy. Mr Poli is Executive Chairman and has a relevant interest in approximately 28.92% of the issued Aquila Shares. Mr Poli is considered to be independent for the purposes of considering the Offer. Mr Lu is not considered to be an independent director of Aquila in the context of considering the Offer. Mr Lu declines to make a recommendation to Aquila Shareholders regarding the Offer, for the reason that as a senior executive of a related body corporate of Baosteel (a Bidder), he is not independent of the Bidders. Mr Lu did not participate in the consideration given by the Independent Board Committee to the Offer. In addition, Mr Lu has elected not to consider this Target’s Statement and the document does not contain information known only to Mr Lu in accordance with an ASIC exemption granted to Aquila (as set out in Section 7.10).
3.2 Recommendation and intentions In assessing the Offer, your Independent Directors have had regard to a number of considerations, including the information set out in the Bidders’ Statement and the Independent Expert’s Report. Based on this assessment and for the reasons set out in this Target’s Statement (in particular those set out in Section 2), the Independent Directors recommend that you ACCEPT the Offer in due course, in the absence of a superior proposal. Your Independent Directors believe that their recommendation to accept the Offer in the absence of a superior proposal is finely balanced. The Aquila Group has an attractive and diversified portfolio of assets, and your Independent Directors believe that the Offer Price does not reflect the full underlying value of the Aquila Group nor the strategic value of West Pilbara Iron to the Bidders. However, on balance, after careful consideration of the Offer and the factors set out in this Target’s Statement, each of your Independent Directors recommends that you ACCEPT the Offer in due course, in the absence of a superior proposal. Mr Tony Poli, the Executive Chairman of Aquila, has a relevant interest in approximately 28.92% of the issued Aquila Shares. Mr Poli currently intends to ACCEPT the Offer, in the absence of a superior proposal, in relation to
For personal use only use personal For the Aquila Shares in which he has a relevant interest. However, he reserves the right to revisit this. The remaining Independent Directors do not have a relevant interest in any Aquila Shares.
Target’s Statement 11
Aquila Resources Limited | Target’s Statement 12 4 Steps to be taken as an Aquila Shareholder
Your Independent Directors unanimously recommend that you ACCEPT the Offer in due course, in the absence of a superior proposal. However, as an Aquila Shareholder you have three options currently available to you. You are encouraged to read this Target’s Statement in full and seek appropriate financial and taxation advice before taking any action in response to the Offer.
If you wish to accept the Offer you should refer to the Bidders’ Statement for Option 1 instructions on how to do so (including, if applicable, through the Bidders’ institutional acceptance facility). ACCEPT the Offer If you accept the Offer, you: • will not receive the Offer Price until each Condition is fulfilled or freed; • will not be able to withdraw your acceptance and sell your Aquila Shares except in certain limited circumstances, meaning you may not be able to accept a higher price from a superior proposal (if any); and • may be liable to pay CGT, income tax and goods and services tax on the disposal of your Aquila Shares which may have financial consequences for you (refer to Section 5.14 and section 10 of the Bidders’ Statement for further details of the tax consequences of the Offer). Your Independent Directors recommend that you delay your acceptance of the Offer until 3 July 2014. After that time, you should accept the Offer as soon as possible to ensure that your acceptance is received by the close of the Offer, noting that if acceptances are mailed they will need to be received in Melbourne before the close of the Offer. The Offer is currently scheduled to close at 5.00pm (WST) on 11 July 2014 (unless withdrawn or extended).
You can still sell your Aquila Shares on market for cash if you have not already Option 2 accepted the Offer. On 19 June 2014 (being the last Business Day before this Target’s Statement Sell your Aquila was printed), the price of Aquila Shares closed at $3.38, a 0.6% discount to the Shares on market Offer Price. The latest price of Aquila Shares may be obtained from the ASX website. If you sell your Aquila Shares on market, you: • may be liable for CGT or income tax on the sale (including under the CGT rules); • may incur a brokerage charge; • may be liable for goods and services tax on incidental costs associated with the sale (such as the brokerage charge); and • will not receive the benefits of any superior proposal (should one emerge).
If you wish to sell your Aquila Shares on market, you should contact your broker. For personal use only use personal For If you do not wish to accept the Offer or sell your Aquila Shares on market you Option 3 should DO NOTHING.
Reject the Offer If you do not wish to accept the Offer, do not take any action in relation to all documents sent to you by the Bidders.
Target’s Statement 12
Aquila Resources Limited | Target’s Statement 13 5 Information about the Offer and other important issues
5.1 Summary of the Offer The Bidders are offering $3.40 cash for each of your Aquila Shares. This will only be payable if all the Conditions are fulfilled or freed by the Bidders. On 13 June 2014, the Bidders declared the Offer Price (of $3.40 per Aquila Share) to be final. Under ASIC’s “truth in takeovers” policy, the Bidders are not able to increase the Offer Price. Further, the Bidders have also stated that (subject to any automatic extension under the Corporations Act), they do not intend to extend the Offer Period, which is scheduled to close at 5.00pm (WST) on 11 July 2014, unless all remaining Conditions are either fulfilled or freed by the Bidders prior to that time. See the comments on this in Sections 5.5 and 5.6 below. The Offer is made to each person registered as a holder of Aquila Shares on the share register of Aquila as at the Record Date and extends to: • holders of Aquila securities as at the Record Date (including Aquila Performance Rights, Aquila Options and Aquila Share Appreciation Rights) who become registered as the holder of Aquila Shares during the period from the Record Date to the end of the Offer Period due to the conversion of, or exercise of rights conferred by, such securities; and • any other person who becomes registered as the holder of Aquila Shares during the Offer Period. The Bidders are offering to acquire all of your Aquila Shares. Accordingly, you may only accept the Offer in respect of all of your Aquila Shares.
5.2 Conditions to the Offer The Offer is subject to a number of Conditions which are set out in section 12.7 of the Bidders’ Statement. If any of these Conditions are not fulfilled or freed by the Bidders before the end of the Offer Period, then the Offer will lapse and no consideration will be received by any Aquila Shareholders who have accepted the Offer. When considering how the Conditions may affect the prospects of success of the Offer, you should be aware that there is no certainty as to whether the Conditions will be fulfilled. A number of Conditions specify that the Condition will be fulfilled by Aquila or a third party not taking certain actions during the Offer Period. If a Condition is not fulfilled during the Offer Period, the Bidders will have discretion whether to declare the Offer free of the Condition or to allow the Offer to fail. The Aquila Group has a number of project interests at various stages of development (including via joint venture interests) across a number of jurisdictions. As a result, the Aquila Group is continually entering into contracts and incurring commitments in the ordinary course of its business or pursuant to existing obligations. A number of these contracts have been proposed in announcements by Aquila prior to announcement of the Offer. In addition, the Aquila Group regularly looks to acquire assets and to consider opportunities from third parties to participate in the development of its assets in the ordinary course of its business.
The Aquila Group is taking appropriate measures to manage expenditure and commitments in light For personal use only use personal For of the Conditions. However, it is possible that by the Aquila Group continuing its ordinary operations, certain Conditions may become incapable of being fulfilled in the future (including, but not limited to, the Conditions contained in sections 12.7(d) and 12.7(f) of the Bidders’ Statement).
Target’s Statement 13
Aquila Resources Limited | Target’s Statement 14
Aquila considers that the drafting of some of the Conditions is unduly restrictive. In a number of Conditions, the wording is uncertain. In some instances, the Conditions may give rise to situations where undertaking actions which are in the ordinary course of the business of the Aquila Group and not material in the context of the Aquila Group’s operations, may result in certain Conditions becoming incapable of being fulfilled. Further, in light of these matters, there may be no notice by Aquila that a Condition has not been fulfilled. If the Bidders were to seek to rely on a perceived failure to fulfil any Condition resulting from the Aquila Group continuing to operate its business in the ordinary course or pursuant to existing obligations or in reliance on a matter which is not material in the context of the Aquila Group’s operations, Aquila will undertake such actions that it considers necessary to preserve the interests of Aquila Shareholders. This may include making an application to the Takeovers Panel for a declaration that reliance by the Bidders on such Conditions constitutes “unacceptable circumstances”.
5.3 Notice of Status of Conditions Section 12.8(e) of the Bidders’ Statement indicates that the Bidders will give a Notice of Status of Conditions to ASX and Aquila on 3 July 2014. The Bidders are required to set out in the Notice of Status of Conditions: • whether the Offer is free of any or all of the Conditions; • whether, so far as the Bidders know, any of the Conditions have been fulfilled on the date the notice is given; and • the Bidders’ voting power in Aquila. If a Condition is fulfilled (so that the Offer becomes free of that Condition) during the bid period but before the date on which the Notice of Status of Conditions is required to be given, the Bidders must, as soon as practicable, give the ASX and Aquila a notice that states that the particular Condition has been fulfilled.
5.4 Offer Period Unless the Offer is extended or withdrawn, it is open for acceptance until 5.00pm (WST) on 11 July 2014. The circumstances in which the Bidders may extend or withdraw the Offer are set out in Sections 5.5 and 5.6.
5.5 Extension of the Offer Period On 13 June 2014, the Bidders announced that they will not extend the Offer Period beyond 5.00pm (WST) on 11 July 2014, unless all remaining Conditions are fulfilled or freed by them prior to that time. Under the Corporations Act and in the absence of their announcement, the Bidders could have extended the Offer Period at any time before they give the Notice of Status of Conditions (referred to in Section 5.3) while the Offer is subject to Conditions. The Bidders may not free any Conditions (other than the prescribed occurrences Condition in section 12.7(j) of the Bidders’ Statement) after the Notice of Status of Conditions is given on 3 July
2014. As such, if the Bidders intend to free Conditions, they must do so on or before 3 July 2014. For personal use only use personal For If, within the last seven days of the Offer Period, the Bidders’ voting power in Aquila increases to more than 50%, there will be an automatic extension of the Offer Period which ends 14 days after this event occurs.
Target’s Statement 14
Aquila Resources Limited | Target’s Statement 15
If the Conditions have been either fulfilled or freed by 11 July 2014, it is possible that the maximum duration of the Offer Period could be up to 12 months.
5.6 Withdrawal of Offer The Bidders may not withdraw the Offer if you have already accepted it (although the Conditions may not be fulfilled and the Offer may lapse if those Conditions are not freed). Before you accept the Offer, the Bidders may withdraw the Offer with the written consent of ASIC and subject to the conditions (if any) specified in such consent.
5.7 Lapse of Offer The Offer will lapse if the Conditions are not either freed or fulfilled by the end of the Offer Period. In such circumstances, all contracts resulting from acceptance of the Offer and all acceptances that have not yet resulted in binding contracts are void. In that situation, you will be free to deal with your Aquila Shares as you see fit.
5.8 Effect of acceptance The effect of acceptance of the Offer is set out in sections 12.5 and 12.6 of the Bidders’ Statement. You should read those provisions in full to understand the effect that acceptance will have on your ability to exercise the rights attaching to your Aquila Shares and the representations and warranties which you give by accepting the Offer.
5.9 Superior proposal If you accept the Offer, you are unlikely to be able to accept any superior proposal made by another bidder for your Aquila Shares, should one emerge. If another proposal is announced during the Offer Period, Aquila will issue a supplementary target’s statement.
5.10 Compulsory acquisition The Bidders have stated in section 9.2(a) of the Bidders’ Statement that if they become entitled to proceed to compulsorily acquire Aquila Shares in accordance with the Corporations Act, they intend to do so. Under Part 6A.1 of the Corporations Act, the Bidders will be able to compulsorily acquire any outstanding Aquila Shares for which they have not received acceptances on the same terms as the Offer if during, or at the end of, the Offer Period, the Bidders (taken together with their respective associates): • have a relevant interest in at least 90% (by number) of Aquila Shares; and • have acquired at least 75% (by number) of Aquila Shares for which it has made an Offer. If these thresholds are met, the Bidders will have one month from the end of the Offer Period within which to give compulsory acquisition notices to Aquila Shareholders who have not accepted the Offer. The consideration payable by the Bidders will be the Offer Price last offered under the Offer. Aquila Security holders may challenge any compulsory acquisition relating to their Aquila Securities, but this would require the relevant Aquila Security holder to establish to the satisfaction of a court that the terms of the offer do not represent ‘fair value’ for their Aquila Securities. If their Aquila Securities are compulsorily acquired, Aquila Security holders are not likely to receive any payment For personal use only use personal For until at least one month after the compulsory acquisition notices are sent and after having completed the necessary documentation.
Target’s Statement 15
Aquila Resources Limited | Target’s Statement 16
5.11 Consequences of the Bidders acquiring less than 90% of Aquila If the Bidders jointly acquire more than 50% but less than 90% of Aquila Shares then, assuming all other Conditions are fulfilled or freed, the Bidders will acquire a majority shareholding in Aquila. In those circumstances, Aquila Shareholders who do not accept the Offer will be minority shareholders in Aquila. This has a number of potential implications, including: • the Bidders will be in a position to cast the majority of votes at a general meeting of Aquila. This will enable them to control the composition of the Aquila Board and senior management, and control the strategic direction of the Aquila Group. The Bidders have stated their intention to change the Aquila Board to comprise four nominees of Baosteel, one nominee of Aurizon and two independent directors if the Bidders acquire more than 50% but less than 90% of Aquila Shares; • the Bidders may pursue the intentions which they have set out in section 9 of the Bidders’ Statement; • a possible impact on Aquila’s financing arrangements and material contracts, as described in more detail in Section 7.5; • the liquidity of Aquila Shares may be lower than at present, and there is a risk that Aquila could be removed from certain S&P/ASX market indices due to lack of spread, free float or liquidity; • if Mineral Resources remains a shareholder of Aquila, there may be differences between the strategic objectives of Mineral Resources and those as stated by the Bidders (particularly in relation to development plans for West Pilbara Iron); and • the Bidders may seek to have Aquila removed from the official list of the ASX. If delisting occurs, Aquila Shares will not be able to be bought or sold on the ASX. The Bidders’ Statement states that the Bidders would intend to maintain Aquila’s listing on the ASX subject to the requirements for listing (including a sufficient spread of investors) continuing to be satisfied. In addition, if the Bidders acquire 75% or more of Aquila Shares, they will be able to pass a special resolution at a meeting of Aquila Shareholders. This will enable the Bidders to, amongst other things, change Aquila’s constitution. If the Offer lapses, or if the Bidders acquire less than 50% of Aquila Shares and waive the 50% minimum acceptance Condition, the trading price of Aquila Shares may be higher or lower than the Offer Price. If you remain an Aquila Shareholder in this circumstance, you will continue to enjoy the rewards, and be subject to the risks, of being an Aquila Shareholder.
5.12 Bidders’ intentions for Aquila, including West Pilbara Iron Section 9.2 of the Bidders’ Statement outlines the Bidders’ intentions in relation to Aquila and West Pilbara Iron if they acquire 90% or more of the Aquila Shares (and therefore proceed to compulsory acquisition). Aquila Shareholders are encouraged to read section 9.2 of the Bidders’ Statement if they would like further information regarding the Bidders’ intentions for Aquila, including West Pilbara Iron.
5.13 When you will receive your consideration if you accept the Offer No Offer Price for Aquila Shares accepted into the Offer will be provided until after the Offer becomes unconditional. If the Offer becomes unconditional, you will be provided with the Offer Price within 21 days after the date of your acceptance of the Offer or, if the Offer is subject to a Condition For personal use only use personal For when you accept the Offer, within 21 days after the contract resulting from your acceptance of the Offer becomes unconditional. See section 12.9 of the Bidders’ Statement for further details on when you will be provided with your Offer Price from the Bidders.
Target’s Statement 16
Aquila Resources Limited | Target’s Statement 17
5.14 Australian tax consequences of accepting the Offer The taxation consequences of accepting the Offer depend on a number of factors and will vary depending on your particular circumstances. Aquila appointed Ernst & Young to prepare a taxation report in relation to the taxation implications relating to acceptance of the Offer for Australian resident Aquila Shareholders which is included in Annexure B (Taxation Report). The information contained in the Taxation Report has been provided by Ernst & Young for the purposes of this Target’s Statement and is based on the Australian income taxation law as at the date of this Target’s Statement. You should carefully read and consider the taxation consequences of accepting the Offer. Aquila Shareholders should seek appropriate independent professional advice that considers the taxation
implications in respect of their own specific circumstances, including foreign tax implications (if any). For personal use only use personal For
Target’s Statement 17
Aquila Resources Limited | Target’s Statement 18
6 Important matters for Aquila Shareholders to consider
6.1 Overview of Aquila Aquila is a public company listed on the ASX (ASX code: AQA). Aquila is a growth-oriented resources explorer and developer focused on the key steel making raw materials of iron ore, metallurgical coal and manganese. Since listing on the ASX in 2000, Aquila has grown to become an ASX 200 public company with a significant portfolio of project interests. The Aquila Group’s two major bulk commodity projects are Eagle Downs (which is under construction) and West Pilbara Iron. The Aquila Group also has control of a portfolio of earlier stage / smaller scale assets in Queensland, Australia and South Africa, which the Aquila Group continues to progress in advance of potential development, partnering or monetisation. Details of the Aquila Group’s interests in these projects are set out below. Aquila has a track record of divesting assets in order to raise equity funding for its share of project development costs. During the 2013 financial year, Aquila completed the sale of three assets for net proceeds totalling A$617 million, resulting in a net gain on sale of A$491 million. These asset sales consisted of the Aquila Group’s 50% interest in Isaac Plains, 24.5% interest in Belvedere and its interest in preference shares in WICET Holdings Pty Ltd.
6.2 Core projects West Pilbara Iron, Western Australia, Australia West Pilbara Iron is a large-scale DSO development project located in the Pilbara region of Western Australia, Australia. Stage 1 of the project is expected to involve the development and mining of eight deposits and construction of approximately 282km of heavy haul rail infrastructure and a multi- user deep water port at Anketell Point. The participants in the API JV are the Aquila Group (50%) and AMCI (50%). The manager of the API JV is API Management, in which the joint venture participants each own 50%. The Aquila Group also holds interests in the Red Hill iron ore joint venture (currently 30%, increasing to 40% on commencement of commercial production), the Mount Stuart iron ore joint venture (35%) and the Yalleen Project7. The West Pilbara Iron Feasibility Study proposed iron ore mining, with a 1.13:1 strip ratio, and export of 30Mtpa of direct shipping iron ore over a 15 year mine life.8 Subsequent to the West Pilbara Iron Feasibility Study, capital and operating costs for the project were revised in October 2012, with base case direct capital costs (including the project management contractor and contingency) increased to $7.4 billion9 and base case cash operating costs revised to approximately A$24/dmt.10 Stage 1 of West Pilbara Iron is underpinned by a 445Mt JORC Reserve grading 57% Fe (166Mt Proved, 279Mt Probable). The proposed West Pilbara Fines product specification for Stage 1 reserves is 57.05% Fe content, 3.44% Al2O3, 5.75% SiO2 and 0.07% P. There is potential for further growth beyond Stage 1, with a current JORC Resource of 2,233Mt (315Mt Measured, 463Mt Indicated, 1,455Mt Inferred) within West Pilbara Iron and other Pilbara
For personal use only use personal For
7 There appears to be disagreement as to whether Helix Resources Limited, which initially held a 30% interest in the Yalleen Project, has had its interest diluted to a royalty. 8 Refer to Annexure D under the heading “Production Target Disclosure Statement”. 9 Real July 2012. 10 Dry metric tonne. Real July 2012.
Target’s Statement 18
Aquila Resources Limited | Target’s Statement 19
tenements which form part of the API JV. Further exploration potential exists across the tenement portfolio. Expenditure on West Pilbara Iron is expected in FY15 to be approximately A$22 million11, continuing at a rate largely consistent with FY14 expenditure. Eagle Downs Hard Coking Coal Project, Queensland, Australia Eagle Downs is an underground multi-seam longwall coal mine currently under construction, located in the Bowen Basin, central Queensland. The mine will target the seams of the Moranbah Coal Measures adjacent to and down dip from BMA’s Peak Downs coal mine. Eagle Downs is the primary asset of the BCC JV. The participants in the BCC JV are the Aquila Group (50%) and BCC (50%), a wholly owned subsidiary of Vale. The manager of the BCC JV is Eagle Downs Coal Management Pty Ltd, in which the joint venture participants each own 50%. Upon commencement of production, Eagle Downs is expected to produce an average of 4.5Mtpa from one underground longwall over the first 10 years of full production.12 Eagle Downs is expected to have a 47 year mine life and the project is underpinned by a JORC Coal Reserve of 254.1Mt (206.6Mt Proved, 47.5Mt Probable). The BCC JV also contains Eagle Downs South, which is an earlier stage exploration-phase project. Eagle Downs South is the southern extension of Eagle Downs and is surrounded by Eagle Downs to the north, BMA’s Peak Downs coal mine to the west, BMA’s Saraji coal mine and Saraji East deposit to the south, Lake Vermont Mine to the south-west and the Winchester South project (in which Rio Tinto Limited has a 75% interest) to the east. Prior to announcement of the Offer, the Aquila Group was well advanced in a process intended to realise value from Eagle Downs through a reduction of the Aquila Group’s equity interest in the project. If successful, there would be a corresponding reduction in the Aquila Group’s capital commitments. The announcement of the Offer has effectively put this process on hold.
6.3 Portfolio Projects Thabazimbi Iron Ore Project, Limpopo Province, South Africa Thabazimbi is one of the two major projects of the TJV. The participants in the TJV are the Aquila Group (74%) and Rakana Consolidated Mines (Proprietary) Limited (26%). The project is located in a historic iron ore producing region, approximately 230km north of Johannesburg, South Africa. Thabazimbi consists of a number of iron ore exploration targets on five prospecting tenements, with the Meletse Deposit being the most advanced. The Meletse Deposit contains an estimated JORC Resource of 80.8Mt grading 61.1% Fe (37.1Mt Measured, 23.5Mt Indicated, 20.2Mt Inferred). Aquila completed a Conceptual Revision Study in 2013 for the Meletse Deposit, which indicated the deposit may have the potential to support an open pit operation targeting DSO grade (>62% Fe) lump and fines ore. A mining right application for the Meletse Deposit was lodged in July 2013. Avontuur Manganese Project, Northern Cape Province, South Africa Avontuur is the second major project of the TJV (as noted above, the participants are the Aquila Group (74%) and Rakana Consolidated Mining (Pty) Ltd (26%)). The project is located adjacent to the Kalahari Manganese Field, approximately 525km west of Johannesburg, South Africa. Avontuur consists of a number of manganese exploration targets across the Avontuur tenement with the Gravenhage Deposit, situated at the northern end of the project, being the most advanced. Total estimated JORC Resources of 141.7Mt grading 38.4% Mn have been delineated on the Avontuur
For personal use only use personal For project. The Avontuur Feasibility Study was completed for the Gravenhage Deposit in 2011 which proposed a 1.5Mtpa operation (initially open pit followed by underground mining) producing oxide
11 On a 100% basis. 12 Refer to Annexure D under the heading “Production Target Disclosure Statement”.
Target’s Statement 19
Aquila Resources Limited | Target’s Statement 20
manganese ore over an expected mine life of 17 years, inclusive of the initial ramp-up in production.13 The Gravenhage Deposit has an estimated JORC Reserve of 20.2Mt grading 40.1% Mn (8.6Mt Proved, 11.6Mt Probable). Subsequent to the Avontuur Feasibility Study, Aquila completed a drilling campaign at the Gravenhage Deposit leading to a restatement of the JORC Resource. The combined Measured and Indicated Resource increased by 16% to 92.3Mt.14 A revision of the Avontuur Feasibility Study to incorporate the updated JORC Resource is in progress. Aquila Group’s application on 14 December 2010 for the grant of a mining right with respect to its Gravenhage Deposit has been hampered by an overlapping prospecting right purportedly granted to another party owned by three sovereign governments. See Section 7.6 for further details regarding this matter. Washpool Hard Coking Coal Project, Queensland, Australia Washpool is a proposed open-cut coal mine situated in the Bowen Basin in central Queensland, which is wholly owned by the Aquila Group. The project is located approximately 20km north-west of Blackwater between Ensham Coal Mine to the west and Curragh Coal Mine to the east. In 2011, Aquila finalised a feasibility study (being the Washpool Feasibility Study), which confirmed the viability of a 2.6Mtpa15 export operation over an estimated 16 year mine life, based on a JORC Reserve of 108.3Mt (94.7Mt Proved, 13.5Mt Probable). In 2014, the Washpool Supplementary Study built upon the findings of the Washpool Feasibility Study. As part of the Washpool Supplementary Study large-scale blending trials were conducted which demonstrated that Washpool coal enhances the coking properties of complementary semi-hard coking coals. The project’s mining lease applications are well advanced, having undergone mining technical assessment and are in the process of finalising environmental approvals and negotiating land compensation agreements. Walton PCI Coal Project, Queensland, Australia Walton is a potential open-cut mine located in the Bowen Basin in central Queensland, which is wholly owned by the Aquila Group. The project is situated approximately 25km east of Blackwater, adjacent to the Dingo West Project to the South and the Bluff Project to the west. Regional infrastructure, including the Capricorn Highway and Blackwater rail system, passes through the southern section of the project area. A Pre-Concept Study was completed in 2013 proposing a high yielding low volatile matter PCI coal. The project area contains an estimated JORC Resource of 46.6Mt, of which 27.5Mt is Rangal Coal Measures (14.4Mt Measured, 3.1Mt Indicated, 10.0Mt Inferred) and 19.1Mt is Burngrove Coal Measures (19.1Mt Inferred). Talwood Coking Coal Project Queensland, Australia Talwood is a potential underground mine situated in the Bowen Basin in central Queensland, which is wholly owned by the Aquila Group. The project is situated approximately 35km north of Moranbah, adjacent to and immediately down dip from BMA’s Goonyella Riverside and Broadmeadow Mines. A Concept Study was completed in 2011, proposing an underground coal mine. The project area contains an estimated JORC Resource of 434.9Mt16 (77.9Mt Measured, 107.6Mt Indicated, 249.3Mt Inferred).
6.4 JORC Unless otherwise stated, the information in this Target’s Statement relating to JORC Reserves and JORC Resources was prepared and disclosed under JORC Code 2004. It has not been updated to
comply with JORC Code 2012 on the basis the information has not materially changed since it was For personal use only use personal For
13 Refer to Annexure D under the heading “Production Target Disclosure Statement”. 14 Refer to Annexure D. 15 Refer to Annexure D under the heading “Production Target Disclosure Statement”. 16 Refer to Annexure D.
Target’s Statement 20
Aquila Resources Limited | Target’s Statement 21
last reported. All references to reserves and resources are stated on a 100% basis, irrespective of the Aquila Group’s ownership interest, unless otherwise stated.
6.5 Cash and liquid investments As at 31 March 2014, the Aquila Group had cash reserves and liquid investments totalling A$507 million and no bank debt. This amount does not include any provision relating to the Isaac Plains Insurance Claim.
6.6 Risk factors There are risks which are specific to Aquila (or other entities within the Aquila Group) and other risks which apply to investments generally which may materially and adversely affect the future operating and financial performance of the Aquila Group and the value of Aquila Shares. This Section 6.6 identifies the material risks (both of a specific and general nature) associated with an investment in Aquila. The material risks described in this Section are not the only risks that the Aquila Group faces and should not be taken as an exhaustive list of the risk factors to which the Aquila Group and Aquila Shareholders are exposed. Some material risks can be mitigated by the use of safeguards and appropriate systems and controls, but some are outside the control of the Aquila Group and cannot be mitigated. Further, there may be risks not known to Aquila and some that the Independent Directors currently believe to not be material which may subsequently turn out to be material. One or more or a combination of these material risks could materially impact the Aquila Group’s businesses, its operating and financial performance, the price of Aquila Shares or any dividends which might be paid in respect of Aquila Shares. If you reject the Offer and continue to hold Aquila Shares, your investment in Aquila will be subject to these and other risks. (a) Financing and capital The Aquila Group’s continued ability to effectively implement its business plan over time may depend in part on its ability to raise additional funds. Notwithstanding the Aquila Group’s cash position, with both West Pilbara Iron and Eagle Downs being potentially significant bulk commodity mining operations, and West Pilbara Iron requiring greenfield rail and port infrastructure, the Aquila Group’s capacity to develop these projects depends on its ability to put significant funding solutions in place for its respective share of funding for each of these significant projects. The Aquila Group must also invest significant funds to maintain or increase its current reserve and resource profile and some of the Aquila Group’s projects may require greater investment than currently planned. There can be no assurance that the Aquila Group will generate sufficient cash flow, or that access to sufficient investments, loans or other financing alternatives will be secured on commercially acceptable terms or at all by the Aquila Group to enable it to continue with current or proposed activities. If the Aquila Group is unable to raise financing as needed, the Aquila Group would need to reduce its planned capital expenditure and may not be able to complete the development of its projects. (b) Counterparty risks As part of the Aquila Group’s commercial activities, Aquila Group companies are currently party to, or involved in, a number of joint venture arrangements (including for West Pilbara For personal use only use personal For Iron, complex and interrelated joint venture arrangements as described in Section 6.2). The Aquila Group may also become party to additional joint venture arrangements and other contractual arrangements with third parties in the future. As a result, the Aquila Group does not have outright control of its major projects and, therefore, is limited in its ability to
Target’s Statement 21
Aquila Resources Limited | Target’s Statement 22
influence key joint venture decisions as a result of the behaviour and decisions of the other participants in relevant joint ventures. Joint ventures necessarily involve special risks. Such risks include the possibilities that the other participants in relevant joint ventures may: have economic or business interests that are opposed to those of the Aquila Group; exercise veto or change of control rights so as to block actions that the Aquila Group believes to be in its, or the relevant joint venture’s, best interests; or be unable or unwilling to fulfil their obligations under the relevant joint venture or other agreements (which may, amongst other things, result in the Aquila Group making additional unforeseen financial contributions to the relevant joint venture). (c) Infrastructure and access risk Access to, and in certain circumstances the establishment of, appropriate infrastructure on commercially acceptable terms (particularly rail and port) is an essential component in the development of most of the Aquila Group’s bulk commodity assets (including West Pilbara Iron and Eagle Downs). Such access may not be able to be secured, or such infrastructure established (including mine infrastructure) at all or on commercially acceptable terms, in respect of the Aquila Group’s assets. This includes the risks that: • for the Aquila Group’s Queensland coal assets, whilst the Aquila Group currently holds 1.6Mtpa of port capacity at WICET for Washpool: - the requisite port capacity (or, if the Aquila Group’s port capacity at WICET is able to be utilised for Eagle Downs as currently planned, the balance of requisite port capacity) and associated above and below rail capacity for the Aquila Group’s expected share of coal from Eagle Downs may not be able to be secured at all or on commercially acceptable terms; - the Aquila Group’s port capacity at WICET may not be utilised (in whole or part), resulting in the Aquila Group incurring take or pay costs (which costs are expected to commence in 2015 in respect of port capacity at WICET and associated below rail commitments arising from the Wiggins Island Rail Project Deed); and - to the extent that the Aquila Group’s port capacity at WICET is utilised for its expected share of coal from Eagle Downs, that port capacity will not be able to be utilised for its expected share of coal from Washpool and vice versa; • for South Africa, failure to secure adequate haulage agreements with Transnet at all or on commercially acceptable terms may impact the future viability of the Aquila Group’s South African projects; and • for West Pilbara Iron, the requisite consents, approvals and agreements necessary to establish rail and port infrastructure (including a state rail licence granted by the Western Australian Government) and for access to adequate port capacity may not be secured at all or on commercially acceptable terms. Ultimately, the inability to access and develop key infrastructure at all or on commercially acceptable terms may negatively impact the Aquila Group’s future financial performance. (d) Commodity price volatility If the Aquila Group commences production, iron ore, coal and manganese ore are internationally traded commodities and price changes are driven by a number of supply and demand factors which are outside of the Aquila Group’s control and are subject to exchange
For personal use only use personal For rate risks. In addition, commodity prices fluctuate and are affected by many factors beyond the control of the Aquila Group. Changes to commodity prices may impact the value of the Aquila Group’s projects and any revenue derived from those projects.
Target’s Statement 22
Aquila Resources Limited | Target’s Statement 23
(e) Possible future trading price If the Offer lapses, Aquila Shares are likely to trade at a price below the current market price of Aquila Shares and the Offer Price. The Independent Directors are not in a position to speculate on the future trading price of the Aquila Shares, including if the Offer lapses. The future price of Aquila Shares is dependent not only on Aquila’s performance, but also on external market and other factors, including those set out in this Section 6.6, which are outside the Aquila Group’s control. (f) Environmental risks and health and safety The proposed activities and operations of the Aquila Group are subject to Australian and South African laws and regulations concerning the environment and health and safety matters. Although the Aquila Group endeavours to conduct its activities in a safe and environmentally responsible manner, if it is responsible for environmental damage it may incur substantial costs for rehabilitation, emergency response and losses by third parties resulting from its operations. In addition, some of the Aquila Group’s activities are conducted in potentially hazardous conditions, which can lead to accidents resulting in significant trauma, loss of life, compensation claims or payments, some of which may not be insured. Production delays can also occur as a result of a significant event. Environmental and health and safety legislation may change in a manner that may require stricter or additional standards than those now in effect, a heightened degree of responsibility for companies, their directors, employees, contractors and suppliers and more stringent enforcement of existing laws and regulations. It may also have an adverse impact on the Aquila Group’s ability to obtain any environmental approvals which may be a prerequisite to commencing construction or production. Environmental and health and safety issues may lead to increased costs, approval delays or rejections, and other difficulties with compliance for the Aquila Group, including loss of tenure in extreme circumstances. (g) Operating risks The current and future operations of the Aquila Group, including exploration, appraisal, construction and possible production activities may be affected by a range of factors, including adverse geological conditions, limitations on activities due to seasonal weather patterns and cyclone activity, unanticipated operational and technical difficulties encountered in geophysical surveys, drilling and production activities, mechanical failure of operating plant and equipment, industrial and environmental accidents, industrial disputes, riots and other force majeure events, unexpected shortages or increases in the costs of labour, consumables, spare parts, plant and equipment and the inability to obtain necessary consents or approvals. Further, mechanical or operational failures during drilling, sampling, test work and construction could cause the Aquila Group substantial loss due to the cost of personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. Any of these events might also give rise to claims against the Aquila Group. (h) Exploration and development risk Aquila’s future value will be materially dependent on the success or otherwise of the Aquila
For personal use only use personal For Group’s activities which are directed towards the search, evaluation and development of coal, iron ore, manganese ore and other resources. Exploration for these resources is speculative and involves a significant degree of risk. Although the rewards can be substantial, there is no guarantee that future exploration on territories for which the Aquila Group has exploration permits and licences will lead to a commercial discovery or, if there is such discovery, that the Aquila Group will be able to develop it economically. If at any stage
Target’s Statement 23
Aquila Resources Limited | Target’s Statement 24
the Aquila Group is precluded from pursuing any of its exploration programs or from developing any resource it may identify or decides not to continue with any of these, this may have an adverse effect on the value of Aquila Shares. (i) Resource and reserve estimates Resource and reserve estimates are expressions of judgement based on knowledge, experience and industry practice. Estimates which were valid when originally calculated may alter significantly when new information or techniques become available. In addition, by their very nature, resource and reserve estimates are imprecise and depend to some extent on interpretations, which may prove to be inaccurate. As further information becomes available through additional fieldwork and analysis, the estimates are likely to change. Aquila reviews JORC Code 2004 Resources annually and intends to progressively update and restate JORC Code 2004 Resources to JORC Code 2012 as and when new material work is completed. This may result in alterations to activities planned with respect to the Aquila Group’s projects, which may, in turn, adversely affect the Aquila Group’s operations. (j) Title risk The Aquila Group’s mineral tenement interests are subject to applicable Australian and South African local laws and regulations. There is no guarantee that any permit, licence, lease, application or conversion in which the Aquila Group has a current or potential interest will be granted, renewed or maintained. Tenements (or applications for tenements) in which the Aquila Group has an interest are (or, if granted, will be) subject to the relevant laws and conditions applying in the relevant jurisdiction. Failure to comply with these laws and conditions may render the tenements non-compliant and liable to forfeiture. All of the mineral tenements in which the Aquila Group has an interest may be subject to application for renewal, variation to conditions, surrender and relinquishment of sub-blocks will be required from time to time and is subject to applicable legislation and consent of relevant regulatory authorities. If any mineral tenement is not granted, renewed or varied for any reason, or title is otherwise lost, the Aquila Group may suffer significant damage through loss of the opportunity to discover and develop any mineral resources or reserves on that mineral tenement. (k) Land access and mining negotiations The Aquila Group must comply with any local laws and regulations dealing with the rights of indigenous inhabitants and parties with proprietary interests, including legislation relating to indigenous land rights, cultural heritage and land access. Any failure to meet the requirements of this legislation may have significant economic implications for the Aquila Group. In Australia, the Aquila Group may from time to time need to negotiate with parties claiming an interest in land for access rights to tenements. In addition, agreements may need to be reached with native title claimants and holders in the event of mining. There may be significant delays and costs associated with these negotiations and to reach agreements acceptable to all relevant parties. (l) Reliance on key personnel The Aquila Group has benefited from having a high quality but small management team
available. Loss of a number of key personnel may adversely affect the Aquila Group. For personal use only use personal For (m) Regulatory approvals Any successful progression of discoveries would require obtaining and continuing to hold the necessary mining leases and the relevant regulatory approvals as required from local, provincial, state and national governments in Australia and South Africa (as the case may
Target’s Statement 24
Aquila Resources Limited | Target’s Statement 25
be). The required approvals may be issued at the discretion of the relevant authorities and may be delayed or subject to conditions or preconditions or forfeited or cancelled and any such delay or denial may result in the relevant project being curtailed or abandoned or impose prescribed conditions that may impact a project’s viability. (n) Foreign exchange risk Commodity contracts are often denominated in US dollars. However, the Aquila Group will incur the majority of its costs in Australian dollars or South African Rand. As such, a strengthening or weakening of the Australian dollar or South African Rand relative to the US dollar may impact the Aquila Group’s financial position adversely or positively. In developing its projects, the Aquila Group (or the joint venture managers) may potentially source equipment and other supplies from overseas manufacturers potentially creating an exposure to movements in exchange rates, depending on commercial arrangements. (o) Litigation Litigation risks relating to the Aquila Group include, but are not limited to, contractual claims, employee claims, regulatory disputes, joint venture claims and disputes and the costs associated with such claims and disputes. There is a risk that material or costly disputes could arise which may have a material adverse effect on the financial performance and position of the Aquila Group. (p) Share market risks Share market conditions may affect the value of Aquila’s quoted securities regardless of the Aquila Group’s operating performance. The market price of Aquila Shares may be subject to fluctuation and may be affected by many factors including (but not limited to) the general economic outlook, interest rates and inflation rates, currency fluctuations, commodity price fluctuations, changes in investor sentiment toward particular market sectors, the demand for, and supply of, capital and terrorism or other hostilities. There is also no guarantee that an active market in Aquila Shares will continue or that the price of the Aquila Shares will increase. There may be relatively few buyers or sellers of Aquila Shares on the ASX (or any other trading platform) at any particular time. (q) Sovereign risk The Aquila Group’s exploration and development activities are primarily conducted in Australia and South Africa. There is no assurance that future political and economic conditions will not result in either government adopting policies that may result in changes in laws or implementing new legislation (for instance, the South African Mineral and Petroleum Resources Development Act Amendment Bill). Adverse legislation or political policy (including adverse changes in relation to Black Economic Empowerment requirements) in the jurisdictions in which the Aquila Group operates may affect the Aquila Group’s ability to
undertake exploration and development activities in the manner currently contemplated. For personal use only use personal For
Target’s Statement 25
Aquila Resources Limited | Target’s Statement 26
7 Additional information
7.1 Interests of Directors (a) Interests of Director in securities in Aquila The number and description of securities in Aquila in which each Director has a relevant interest is set out in the table below.
Director Relevant interest in securities in Aquila
Mr T Poli 119,104,536 Aquila Shares Mr G Galt Nil Mr S Scudamore Nil Mr T Netscher Nil Mr Z Lu Nil Ms D Goldsworthy Nil
Mr Poli, being the only Independent Director with a relevant interest in Aquila Shares, currently intends to ACCEPT the Offer in respect of his Aquila Shares, in the absence of a superior proposal. However, Mr Poli reserves the right to revisit this. (b) Dealings by Directors in securities in Aquila There have been no acquisitions or disposals of securities in Aquila by any Director in the four months ending on the day preceding the date of this Target’s Statement. (c) Interests and dealings of Directors in securities in Baosteel No Director has a relevant interest in any securities in Baosteel or a related body corporate of Baosteel. (d) Interests and dealings of Directors in securities in Aurizon Except as set out below, no Director has a relevant interest in any securities in Aurizon or any related body corporate of Aurizon. Mr Netscher, a Director, has a relevant interest in 6,000 ordinary shares in the capital of Aurizon Holdings. (e) Benefits to Directors The Independent Directors (other than Mr Poli) are entitled to be paid additional fees by Aquila of $120,000 in aggregate, in relation to the work they have undertaken as directors of Aquila in relation to the Offer. These fees are to be paid regardless of whether or not the Offer is successful. As a result of the Offer, no benefit (other than a benefit permitted by section 200F or 200G of the Corporations Act and compulsory superannuation entitlements) has been paid or will be paid to any Director or secretary in connection with the loss of, or their resignation from,
their office. For personal use only use personal For (f) Conditional agreements No agreement has been made between any of the Directors and any other person in connection with or conditional upon the outcome of the Offer.
Target’s Statement 26
Aquila Resources Limited | Target’s Statement 27
(g) Interests in contracts with Bidders No Director has any interest in any contract entered into by a Bidder.
7.2 Other material information Under the Corporations Act, the Target’s Statement is required to include all the information that Aquila Shareholders and their professional advisers would reasonably require to make an informed assessment whether or not to accept the Offer, but: • only to the extent to which it is reasonable for Aquila Shareholders and their professional advisers to expect to find this information in this Target’s Statement; and • only if the information is known to any Director. The Independent Directors are of the opinion that the information that Aquila Shareholders and their professional advisers would reasonably require to make an informed assessment whether to accept the Offer is: • the information contained in the Bidders’ Statement; • the information contained in Aquila’s releases to the ASX prior to the date of this Target’s Statement; and • the information contained in this Target’s Statement (including the information contained in the Independent Expert’s Report). The Independent Directors have assumed, for the purposes of preparing this Target’s Statement, that the information in the Bidders’ Statement is accurate (unless they have expressly indicated otherwise in this Target’s Statement). However, the Independent Directors do not take any responsibility for the contents of the Bidders’ Statement and are not to be taken to be endorsing, in any way, any or all of the statements contained in it. In deciding what information should be included in this Target’s Statement, the Independent Directors have had regard to: • the nature of the Aquila Shares; • the matters that Aquila Shareholders may reasonably be expected to know; • the fact that certain matters may reasonably be expected to be known to professional advisers of Aquila Shareholders; and • the time available to Aquila to prepare this Target’s Statement.
7.3 Issued securities The total number of Aquila Shares on 19 June 2014 (being the last Business Day before this Target’s Statement was printed) was 411,804,442. The aggregate number of: • Aquila Performance Rights on 19 June 2014 (being the last Business Day before this Target’s Statement was printed) was 363,987 Aquila Performance Rights; • Aquila Share Appreciation Rights on 19 June 2014 (being the last Business Day before this Target’s Statement was printed) was 1,219,147 Aquila Share Appreciation Rights; and
For personal use only use personal For • Aquila Options on 19 June 2014 (being the last Business Day before this Target’s Statement was printed) was 1,870,000 Aquila Options, being 905,000 Aquila Options with an exercise price of $11.40 and an expiry date of 1 July 2014 and 965,000 Aquila Options with an exercise price of $8.71 and an expiry date of 7 August 2015.
Target’s Statement 27
Aquila Resources Limited | Target’s Statement 28
7.4 Latest financial results and change of financial position The most recent financial statements for Aquila were for the half-year ended 31 December 2013. The financial statements were reviewed by Aquila’s independent auditor, and lodged with the ASX on 5 March 2014. Aquila lodged its latest audited annual financial statements for the full year ended 30 June 2013 with the ASX on 13 September 2013. Except as disclosed in this Target’s Statement, the Independent Directors are not aware of any material change to Aquila’s financial position as disclosed in Aquila’s financial statements for the half year ended 31 December 2013 (lodged with ASX on 5 March 2014).
7.5 Potential impact of Offer on financing arrangements and material contracts The information below has been included in this Target’s Statement because: • it may impact the future prospects of the Aquila Group, which would be relevant to those Aquila Shareholders who may remain as Aquila Shareholders; and • it may be relevant in assessing the likelihood of the Conditions set out in section 12.7 of the Bidders’ Statement being fulfilled. (a) Material financing arrangements Aquila (and other members of the Aquila Group as guarantors) entered into a Corporate Contingent Instrument Facility Agreement dated 2 February 2011 with National Australia Bank Limited and Commonwealth Bank of Australia (Contingent Instrument Facility). The facility limit is $80,000,000. As at the date of this Target’s Statement the facility has been utilised to $38,759,936. The Contingent Instrument Facility provides that, if the control of Aquila changes, it will trigger a “Review Event”, upon which either financier may give notice to Aquila that they wish to renegotiate the Contingent Instrument Facility (and associated documents) which the parties must do in good faith. If Aquila and the financier that gave notice cannot reach agreement on any amendments, refinancing or restructure plan or other relevant matters within 60 days after the financier gives notice, on further notice from the financier, the outstanding balance of the Contingent Instrument Facility may become payable on demand or immediately due for payment. In the event of any of the third parties exercising the guarantees or instruments provided to them under agreements with members of the Aquila Group, Aquila is obliged to repay the amount owing to the respective financier. (b) Material contracts – change of control Other than as set out in Section 7.5(a) and in this Section 7.5(b) below, Aquila is not aware of any material contracts to which a member of the Aquila Group is a party which contains change of control provisions which may be triggered as a result of, or as a result of acceptances of, the Offer and which may have a material adverse effect on the assets and liabilities, financial position and performance, profits and losses and prospects of the Aquila Group. Pursuant to the Wiggins Island Rail Project Deed, if there is a change in control of Aquila such that Aquila is no longer listed on the ASX and the counterparty considers that this For personal use only use personal For causes the creditworthiness of Washpool Coal Pty Ltd to be materially weaker, the counterparty may request that an additional parent company guarantee be provided by Aquila to further guarantee the obligations of Washpool Coal Pty Ltd under the deed.
Target’s Statement 28
Aquila Resources Limited | Target’s Statement 29
7.6 Material disputes As at 19 June 2014, being the last Business Day before this Target’s Statement was printed, except for the matters set out below (details of which are in the public domain), there was no current dispute of a material nature against any member of the Aquila Group known to the Aquila Board. The Aquila Group’s application for the grant of a mining right on 14 December 2010 with respect to its Gravenhage Deposit (forming part of the wider Avontuur area) (Mining Right Application) has been hampered by an alleged overlapping prospecting right purportedly granted to a company owned by the governments of South Africa, Zambia and Zimbabwe, called the Pan African Mineral Development Company Proprietary Limited (PAMDC). The Aquila Group has been seeking to have the DMR set aside the overlapping prospecting right and to decide the Mining Right Application through an internal appeal to the Minister of Mineral Resources. The internal appeal procedure is an administrative process under the relevant South African legislation. PAMDC’s overlapping prospecting right has been suspended pending the internal appeal. On 31 January 2014, PAMDC commenced a cross-appeal (also a statutory administrative process) seeking to have the DMR set aside the Aquila Group’s prospecting right over the Avontuur Manganese Project area. Owing to a failure to adhere to the prescribed statutory time period on the part of PAMDC, it is likely that the Aquila Group’s internal appeal and its Mining Right Application will not be decided until the second half of 2014. There is a risk that the Aquila Group’s appeal and PAMDC’s cross appeal may be further delayed or not decided in the Aquila Group’s favour. The Aquila Group intends to take all necessary action to protect its rights, which may include judicial review proceedings.
7.7 Impact of the Offer on employee arrangements This section summarises the current and former employee arrangements, including additional retention arrangements put in place by Aquila, and the impact of the Offer on those arrangements. Since the Offer was announced on 5 May 2014, Aquila has made some changes to the employment terms of its employees. The Offer has created uncertainty as to the longer term employment prospects of Aquila staff in the event that the Offer is successful and exposes Aquila to the risk that staff will be lost to other companies who are able to offer positions which afford greater certainty. Accordingly, Aquila has put in place arrangements aimed at providing additional incentives for Aquila staff to remain committed to Aquila and stay focussed on achieving Aquila’s business plans, notwithstanding the uncertainty posed by the Offer. (a) Employee incentive plans Aquila currently operates the following employee incentive plans: • the LTIP (pursuant to which Aquila Performance Rights and Aquila Share Appreciation Rights have been granted); and • the STIP (pursuant to which Aquila agreed to pay cash bonuses to certain employees based on the achievement of key performance indicators). There are also Aquila Options on issue under Aquila’s employee share option plan. That share option plan is no longer used as part of Aquila’s employee incentive plans. Details of the Aquila Options are set out in Section 7.3. LTIP In order to provide long term incentives to managers and senior executives, Aquila put in For personal use only use personal For place the LTIP in February 2013. The terms of the LTIP provide that all granted Aquila Performance Rights and Aquila Share Appreciation Rights will automatically vest upon a change of control of Aquila (and also in other circumstances as determined by the Aquila Board).
Target’s Statement 29
Aquila Resources Limited | Target’s Statement 30
On vesting, each Aquila Performance Right entitles the holder to one Aquila Share. The Aquila Share Appreciation Rights entitle the holder to an amount (settled in Aquila Shares) equal to the value of one Aquila Share on the date the change of control occurs less its value at the date the rights were granted (in each case, calculated on a 5 day VWAP basis), multiplied by the number of Aquila Share Appreciation Rights held by that holder. The Aquila Board has calculated that upon a change of control event, based on the number of Aquila Performance Rights and Aquila Share Appreciation Rights currently granted to participants and assuming the 5 day VWAP on the date of the change of control event equals the Offer Price, a maximum of 363,987 Aquila Performance Rights and 1,219,147 Aquila Share Appreciation Rights could vest and as a result, a maximum of 734,375 Aquila Shares could be transferred to holders of Aquila Performance Rights and Aquila Share Appreciation Rights. Aquila does not believe that the acquisition of Aquila Shares by holders of Aquila Performance Rights and Aquila Share Appreciation Rights on vesting of their rights will breach any of the Conditions. In particular, the Condition in section 12.7(j)(vi) of the Bidders’ Statement contemplates the issue of Aquila Shares on vesting of Aquila Performance Rights and Aquila Share Appreciation Rights as being excluded from the no prescribed occurrences Condition. STIP In addition to the LTIP, Aquila operates a short term incentive plan, pursuant to which certain employees are granted cash bonuses upon the satisfaction of company and personal key performance indicators. The Aquila Board has determined that it will pay cash bonuses to employees (not including Mr Poli) who cannot satisfy their key performance indicators for the financial year ended 30 June 2014 because they are directly affected by the Offer. The estimated maximum amount payable to these employees is $175,000. In addition, the Aquila Board will pay employees (not including Mr Poli) a pro-rata portion of a minimum of 50% of their potential cash bonuses for the financial year ended 30 June 2015, to the extent they are made redundant and their employment terminated before 1 July 2015. The estimated maximum amount payable in such circumstances is $1.45 million. The other terms of the STIP remain unchanged. (b) Changes to employment and consultancy agreements For employees with notice of termination periods of less than three months, Aquila has increased the notice period to three months (the increased notice will not apply if employment is terminated due to misconduct, other grounds justifying summary termination or employee initiated termination). The increased notice period will apply for any notice of termination of employment given before 1 July 2015. Also, as announced on 11 June 2014, Aquila has extended the arrangement under which Mr Poli’s services are provided to Aquila (which was due to expire on 30 June 2014) for six months, so that it now ends on 31 December 2014.
7.8 Bidders’ shares held by Aquila Aquila does not have a relevant interest in securities of either of the Bidders or any of their
respective related bodies corporate. For personal use only use personal For
Target’s Statement 30
Aquila Resources Limited | Target’s Statement 31
7.9 Consents (a) Consents to inclusion of a statement Each of the persons listed below has given and has not, before the lodgement of this Target’s Statement with ASIC, withdrawn its written consent to the inclusion of the statements in this Target’s Statement that are specified below in the form and context in which the statements are included and to all references in this Target’s Statement to those statements in the form and context in which they are included: • Grant Samuel – to be named as Independent Expert, and to inclusion of the Independent Expert’s Report and statements said to be based on statements made in the Independent Expert’s Report; • Ernst & Young – to be named as taxation adviser, and to inclusion of the Taxation Report and statements said to be based on statements made in the Taxation Report; • AMC Consultants – to be named as Independent Technical Expert, and to inclusion of the Independent Technical Expert’s Report and statements said to be based on statements made in the Independent Technical Expert’s Report; and • each Director specified in Section 3.1 – to the inclusion of statements made by them. (b) Consents to be named King & Wood Mallesons has given and has not, before the date of this Target’s Statement, withdrawn its consent to the inclusion of its name in this Target’s Statement as legal adviser to Aquila. Goldman Sachs has given and has not, before the date of this Target’s Statement, withdrawn its consent to the inclusion of its name in this Target’s Statement as financial adviser to Aquila. (c) Disclaimer regarding statements made and responsibility Each person named above as having given its consent to the inclusion of a statement or to being named in this Target’s Statement: • does not make, or purport to make, any statement in this Target’s Statement or any statement on which a statement in this Target’s Statement is based other than, in the case of a person referred to above as having given their consent to the inclusion of a statement, a statement included in this Target’s Statement with the consent of that person; and • to the maximum extent permitted by law, expressly disclaims and takes no responsibility for any part of this Target’s Statement, other than a reference to its name and, in the case of a person referred to above as having given their consent to the inclusion of a statement, any statement or report which has been included in this Target’s Statement with the consent of that party.
7.10 ASIC exemption and modification This Target's Statement is required to include all information that holders of Aquila Shares and their professional advisers would reasonably require to make an informed assessment whether to accept the Offer. This information is only required to the extent it would be reasonable to find that
information in this Target's Statement and only if the information is known to the Directors. For personal use only use personal For Aquila has obtained an exemption from ASIC (a copy of which will be made available on request) so that this Target’s Statement (and any supplementary or replacement target's statement) does not need to contain information to the extent that it is known to only Mr Zhaoming Lu for the reasons set out in Section 3.1. This is on the basis that Mr Lu has not at any time been involved in making
Target’s Statement 31
Aquila Resources Limited | Target’s Statement 32
decisions in relation to, or considering Aquila’s responses to, the Offer. For those reasons, Mr Lu is not making any recommendation to Aquila Shareholders. In addition, as announced by Aquila on 18 June 2014, Aquila sought and obtained from ASIC a modification of items 11 and 12 of subsection 633(1) of the Corporations Act to allow this Target’s Statement to be sent to the Bidders (and lodged with ASIC and sent to ASX) by Monday, 23 June 2014 and dispatched by Thursday, 26 June 2014 (in each case, as opposed to Saturday, 21 June 2014).
7.11 Miscellaneous and publicly available information Aquila Shareholders should have regard to material announcements that have been lodged with ASX since Aquila’s last published audited financial statements for the year ended 30 June 2013, which were lodged with ASX on 13 September 2013. A list of material announcements released by Aquila in the period 13 September 2013 to 19 June 2014, the last Business Day before the date this Target’s Statement was printed, is set out in Annexure C. This Target’s Statement also contains statements which are made in, or based on statements made in, documents lodged with ASIC or given to ASX by the Bidders or Aquila. Any Aquila Shareholder who would like to receive a copy of those documents may obtain a copy free of charge during the Offer Period by calling Aquila’s Shareholder Information Line on 1800 992 673 (Toll Free for calls within Australia) or +61 1800 992 673 (callers outside Australia), which is available Monday to Friday between 6.30am and 5.30pm (WST). Copies of announcements by Aquila may also be obtained from its website (www.aquilaresources.com.au).
7.12 Date of Target’s Statement This Target’s Statement is dated 20 June 2014, which is the date on which it was lodged with ASIC.
7.13 Approval of Target’s Statement This Target’s Statement has been approved by a resolution passed by the Independent Directors on 20 June 2014.
______Tony Poli Executive Chairman and Chief Executive Officer
Aquila Resources Limited For personal use only use personal For
Target’s Statement 32
Aquila Resources Limited | Target’s Statement 33
8 Glossary
8.1 Definitions
Defined term Meaning
AMCI AMCI (IO) Pty Ltd (ABN 18 123 253 485).
Announcement Date 5 May 2014.
API JV Australian Premium Iron Joint Venture, an unincorporated joint venture between Aquila Steel Pty Ltd (ABN 86 097 803 613) and AMCI.
API Management API Management Pty Limited (ABN 66 112 677 595).
Aquila Aquila Resources Limited (ABN 81 092 002 769).
Aquila Board Board of directors of Aquila.
Aquila Group Aquila and its related bodies corporate.
Aquila Option An option granted by Aquila under the “Aquila Resources Limited Share Option Plan”.
Aquila Performance A performance right granted by Aquila under the LTIP. Right
Aquila Security An Aquila Share, Aquila Performance Right, Aquila Option or Aquila Share Appreciation Right.
Aquila Security holder A holder of an Aquila Security.
Aquila Share A fully paid ordinary share in Aquila.
Aquila Share A share appreciation right granted by Aquila under the LTIP. Appreciation Right
Aquila Shareholder A registered holder of an Aquila Share.
ASIC Australian Securities and Investments Commission.
ASX ASX Limited (ABN 98 008 624 691) or Australian Securities Exchange, as the context requires.
ASX Listing Rules The official listing rules of the ASX.
Aurizon Aurizon Operations Limited (ABN 47 564 947 264). For personal use only use personal For
Aurizon Group Aurizon and its related bodies corporate.
Aurizon Holdings Aurizon Holdings Limited (ABN 14 146 335 622).
Target’s Statement 33
Aquila Resources Limited | Target’s Statement 34
Defined term Meaning
Avontuur Avontuur Manganese Project, which forms part of the TJV and comprises a prospecting right with registration number 661/2007 PR, an application for renewal of that prospecting right and a mining right application to mine on Portion 114 of Farm 703.
Avontuur Feasibility Feasibility study completed for Avontuur in 2011. Study
Baosteel Baosteel Resources Australia Pty Ltd (ABN 66 154 815 362).
Baosteel Group Baosteel Group Corporation, an enterprise incorporated in the People’s Republic of China which is 100% owned by the State- Owned Assets Supervision and Administration Commission of China.
BCC Bowen Central Coal Pty Ltd (ABN 46 107 198 676).
BCC JV Bowen Central Coal Joint Venture, an unincorporated joint venture between Aquila Coal Pty Ltd (ABN 73 097 801 940) and BCC.
Belvedere Belvedere Coal Joint Venture, in which B D Coal Pty Ltd (ABN 29 113 623 439), an Aquila Group member, is a former participant.
Bidders Aurizon and Baosteel, and Bidder refers to either of them as the context requires.
Bidders’ Statement The bidders’ statement in relation to the Offer, prepared by the Bidders and dated 14 May 2014, as supplemented by the first supplementary bidders’ statement dated 5 June 2014.
BMA BHP Billiton Mitsubishi Alliance, comprising the Central Queensland Coal Associates Joint Venture and Gregory Joint Venture (each an unincorporated joint venture between BHP Billiton and Mitsubishi Development Pty Ltd).
Business Day Has the meaning given in the ASX Listing Rules.
CGT Capital gains tax.
Condition A condition of the Offer set out in section 12.7 of the Bidders’ Statement.
Corporations Act Corporations Act 2001 (Cth).
DMR South African Department of Mineral Resources. For personal use only use personal For
DSO Direct shipping iron ore.
Directors Current directors of Aquila.
Target’s Statement 34
Aquila Resources Limited | Target’s Statement 35
Defined term Meaning
Eagle Downs Eagle Downs Hard Coking Coal Project, which forms part of the BCC JV and comprises ML 70389 and PLa485.
Eagle Downs South Eagle Downs South Project, which forms part of the BCC JV and is the southern extension of Eagle Downs, comprising MDLa 519, EPC 795 and EPC 1077.
Gravenhage Deposit Gravenhage Manganese Deposit, which forms part of Avontuur.
Independent Board Committee comprising the Independent Directors that was given Committee responsibility for considering the Offer.
Independent Directors Those Directors who are not connected with the Bidders, being Tony Poli, Gordon Thomas Galt, Stephen John Scudamore, Timothy Carl Netscher and Denise Goldsworthy.
Independent Expert or Grant Samuel & Associates Pty Limited (ABN 28 050 036 372). Grant Samuel
Independent Expert’s The report prepared by the Independent Expert, a copy of which Report is contained in Annexure A to this Target’s Statement (including its annexures).
Infrastructure Infrastructure framework agreement dated 3 May 2014 between Framework Agreement Baosteel, Aurizon and Fortune BS Company Pte. Ltd., a related body corporate of Baosteel.
Independent Technical AMC Consultants Pty Ltd (ABN 58 008 129 164). Expert or AMC Consultants
Independent Technical The report prepared by the Independent Technical Expert, a Expert’s Report copy of which is Annexure 5 to the Independent Expert’s Report.
Isaac Plains Isaac Plains Coal Mine.
Isaac Plains Insurance Insurance claim for property damage and business interruption Claim due to the flooding event that occurred at Isaac Plains in December 2010, in which the Aquila Group has a 50% economic interest.
JORC or JORC Code The 2004 edition of the ‘Australasian Code for Reporting of 2004 Exploration Results, Mineral Resources and Ore Reserves’, prepared by the JORC Reserves Committee of The Australian Institute of Mining and Metallurgy, Australian Institute of
Geoscientists and Minerals Council of Australia. For personal use only use personal For
Target’s Statement 35
Aquila Resources Limited | Target’s Statement 36
Defined term Meaning
JORC Code 2012 The 2012 edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’, prepared by the JORC Reserves Committee of The Australian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia.
JORC Reserve or JORC Has the meaning given to “Ore Reserve” in paragraph 28 of Code 2004 Reserve JORC Code 2004.
JORC Resource or Has the meaning given to “Mineral Resource” in paragraph 19 of JORC Code 2004 JORC Code 2004. Resource
LTIP Aquila Long Term Incentive Plan put in place in February 2013.
Meletse Deposit Meletse Iron Ore Deposit, which forms part of Thabazimbi.
Mineral Resources Mineral Resources Limited (ABN 33 118 549 910).
Mt Million tonnes.
Mtpa Million tonnes per annum.
Notice of Status of The Bidders’ notice disclosing the status of the conditions to the Conditions Offer which is required to be given by section 630(3) of the Corporations Act, and which is referred to in Section 12.8(e) of the Bidders’ Statement.
Offer The takeover offer by the Bidders for Aquila Shares under Chapter 6 of the Corporations Act, as described in the Bidders’ Statement.
Offer Period The period during which the Offer will remain open for acceptance in accordance with section 12.2(a) of the Bidders’ Statement.
Offer Price The consideration offered under the Offer of $3.40 cash for each Aquila Share.
PCI Pulverised coal injection.
Public Authority Any government or any governmental, semi-governmental, statutory or judicial entity or authority, or any minister, department, office or delegate of any government, whether in Australia or elsewhere. It also includes any self-regulatory
organisation established under statute and any stock exchange. For personal use only use personal For Record Date The date set by the Bidders under section 633(2) of the Corporations Act.
Target’s Statement 36
Aquila Resources Limited | Target’s Statement 37
Defined term Meaning
Shareholder Information line which Shareholders should call if they have any Information Line queries in relation to the Offer. The telephone number is: • 1800 992 673 (Toll Free for calls within Australia); or • +61 1800 992 673 (outside Australia), which is available Monday to Friday between 6.30am and 5.30pm (WST).
South Africa The Republic of South Africa.
STIP Aquila’s short term incentive program described in Section 7.7.
Takeovers Panel The Australian Takeovers Panel.
Talwood Talwood Coking Coal Project.
Target’s Statement This target’s statement dated 20 June 2014.
Taxation Report Has the meaning given in Section 5.14.
Thabazimbi Thabazimbi Iron Ore Project, which forms part of the TJV and comprises prospecting rights, and applications for renewal of prospecting rights, with registration numbers MPT394/2009 PR, MPT748/2007 PR, MPT717/2007 PR, MPT177/2007 PR and MPT126/2011 PR and a mining right application to mine on the Remaining Extent of Donkerpoort 448 KQ and the Remaining Extent of Randstephne 445 KQ.
TJV Thabazimbi Joint Venture, an unincorporated joint venture between Aquila Steel South Africa (Pty) Ltd and Rakana Consolidated Mining (Pty) Ltd.
Vale Vale S.A. (a company incorporated in Brazil).
VWAP Volume weighted average price.
Walton Walton PCI Coal Project, which comprises MDL 505.
Washpool Washpool Hard Coking Coal Project, which comprises MDL 403, MLa 80164, MLa 80176, MLa 80177, EPC 966, EPC 1032 and EPC 958.
Washpool Feasibility Feasibility study completed for Washpool in 2011. Study
Washpool Supplementary study completed for Washpool in 2014.
For personal use only use personal For Supplementary Study
Target’s Statement 37
Aquila Resources Limited | Target’s Statement 38
Defined term Meaning
West Pilbara Iron West Pilbara Iron Ore Project, comprising, amongst other assets, tenement interests located in the West Pilbara region and held by the API JV, Red Hill iron ore joint venture (in which the Aquila Group currently holds a 30% interest increasing to 40% on commencement of commercial production) and Mount Stuart iron ore joint venture (in which the Aquila Group holds a 35% interest) and the Yalleen Project and associated proposed port and rail infrastructure.
West Pilbara Iron Feasibility study completed for West Pilbara Iron in 2010. Feasibility Study
WICET Wiggins Island Coal Export Terminal.
Wiggins Island Rail Wiggins Island Rail Project Deed dated 19 August 2011 between Project Deed Washpool Coal Pty Ltd (an Aquila Group entity) and Aurizon Network Pty Ltd (formerly QR Network Pty Ltd and an Aurizon Group entity).
WST Western standard time.
Yalleen Project Yalleen Project which comprises the rights to iron ore on E47/1169, E47/1170 and E47/1171 pursuant to the heads of agreement between API Management and Helix Resources Limited dated 12 April 2005.
8.2 Interpretation Unless the context otherwise requires: • headings used in this Target’s Statement • a reference to “FY” means a financial year are inserted for convenience and do not ending 30 June; affect the interpretation of this Target’s • a reference to a mineral includes a Statement; reference to coal or coal products; • words or phrases defined in the • a reference to mining tenements includes a Corporations Act have the same meaning reference to exploration permits or licences, in this Target’s Statement; prospecting licences, miscellaneous • a reference to a Section or Annexure is a licences, general purpose lease or licences, reference to a section of, or annexure to, mining leases or any other legal or beneficial this Target’s Statement; interest allowing for the extraction of • a reference to a statute, ordinance, code minerals; or other law includes regulations and • the singular includes the plural and vice other instruments under it and versa; consolidations, amendments, re- • the word “person” includes an individual, a enactments or replacements of any of firm, a body corporate, a partnership, a joint them; venture, an unincorporated body or • a reference to a document includes any association, or any government agency; For personal use only use personal For variation or replacement of it; • figures (including tonnages) used in this • all references to reserves and resources Target’s Statement have been subject to are stated on a 100% basis, irrespective rounding; and of the Aquila Group’s ownership interest, • Australian dollars, dollars, A$ or $ is a unless otherwise stated; reference to the lawful currency of Australia.
Target’s Statement 38
Aquila Resources Limited | Target’s Statement
Annexure A Independent Expert’s Report
For personal use only use personal For
Target’s Statement
GRANT SAMUEL & ASSOC IATES
L E V E L 6 1 COLLINS STREET MELBO URNE VIC 3000 T : + 6 1 3 9 949 8800 / F : + 6 1 3 9949 8838 20 June 2014 www.grantsamuel.com.au
The Directors Aquila Resources Limited Level 2, Aquila Centre 1 Preston Street Como WA 6152
Dear Directors
Takeover Offer from Baosteel and Aurizon
1 Introduction
Aquila Resources Limited (“Aquila”) is an Australian resources company with a focus on iron ore and coal development assets. Its major assets are interests in the Eagle Downs Hard Coking Coal Project (“Eagle Downs”) in Queensland and the West Pilbara Iron Ore Project (“West Pilbara”) in Western Australia.
On 5 May 2014, Baosteel Resources Australia Pty Ltd (“Baosteel”) and Aurizon Operations Limited (“Aurizon”) (together the “Bidders”) announced their intention to make a joint off-market takeover offer for all the ordinary shares in Aquila that the Bidders did not already own (the “Offer”). The consideration under the Offer is $3.40 cash per ordinary Aquila share (“Offer Price”) and values Aquila at approximately $1.4 billion.
Baosteel is a wholly-owned subsidiary of Baosteel Resources International Co., Ltd, the overseas resources development arm of Baosteel Group, a state-owned enterprise and one of China’s largest steelmakers. At the time of the 5 May 2014 announcement, Baosteel had a 19.8% interest in Aquila. Aurizon is a wholly-owned subsidiary of Aurizon Holdings Limited, Australia’s largest rail freight operator, which is listed on the Australian Securities Exchange (“ASX”) and had a market capitalisation on 5 May 2014 of approximately $10.5 billion.
The Offer is subject to the satisfaction of a number of conditions, set out in full in the Bidders’ Statement, including a 50% minimum acceptance condition.
On 12 June 2014, Mineral Resources Limited (“MRL”) announced that it had acquired 52.64 million shares in Aquila, representing 12.78% of Aquila’s shares on issue, and that it was interested in participating in the development of West Pilbara. The majority of MRL’s shares in Aquila were acquired at a price of $3.75 per share. MRL is a Western Australian based company that is focussed on the mining, processing and export of bulk commodities, the provision of contract processing and other specialist mining services, and pipeline engineering. At 17 June 2014, it had a market capitalisation of $1.8 billion.
On 13 June 2014, the Bidders announced that they would not increase the Offer Price and that the offer period would not be extended beyond the scheduled closing date of 11 July 2014, unless the Offer had become unconditional before then. Following this announcement, the Aquila share price fell sharply, closing down more than 12% on the day to $3.10.
For personal use only use personal For On 18 June 2014, Aquila announced that it had received an indicative proposal from MRL for an all-scrip takeover offer for Aquila. Aquila stated that the parties had been unable to agree on terms that were acceptable to both Aquila and MRL, and that the discussions between the parties had ceased. The announcement also stated that Aquila’s executive chairman, Mr Tony Poli, who has a relevant interest in Aquila of 28.92%, intends to accept the Offer in the absence of a superior proposal (while reserving his right to revisit this).
GRANT SAMUEL & ASSOC IATES PTY LIMITED
ABN 28 050 036 372 A FS LICENCE NO 240985
A senior Baosteel executive is a director of Aquila. Accordingly, the directors of Aquila not associated with Baosteel have engaged Grant Samuel & Associates Pty Limited (“Grant Samuel”) to prepare an independent expert’s report for the purposes of S640 of the Corporations Act, setting out whether, in Grant Samuel’s opinion, the Offer is fair and reasonable and the reasons for that opinion. A copy of the report will accompany the Target’s Statement to be sent to shareholders by Aquila. This letter contains a summary of Grant Samuel’s opinion and main conclusions.
For personal use only use personal For
2
2 Summary of Opinion
In Grant Samuel’s opinion the Offer is not fair. However, in Grant Samuel’s view the Offer is reasonable.
Grant Samuel has valued Aquila in the range $3.90-5.24 per share. The Offer Price of $3.40 per share falls below the bottom end of the valuation range. Accordingly, the Offer is not fair.
Assessment of the Offer is not straightforward. While Aquila’s Eagle Downs coal project is in the early stages of construction, Aquila’s other resources assets are all pre-development or exploration interests. Such assets are by their very nature difficult to value. In particular, while West Pilbara is a very large and potentially extremely valuable iron ore project, it will require initial capital expenditure of the order of $7.5-8.0 billion and generate returns over a very long period. The funding and development challenges for a company like Aquila are such that it is likely that the share market has been attributing little or no value to Aquila’s West Pilbara interest. The structure of Aquila’s share register, with more than 70% of the shares held by the top four shareholders, means that Aquila shares are relatively illiquid. It is to be expected that the pre-bid price of Aquila shares would have been a poor indicator of the underlying value of Aquila’s assets.
The Offer from Baosteel and Aurizon is focussed on ownership and development of West Pilbara and demonstrates the view of the Bidders that West Pilbara can be successfully developed. Grant Samuel’s valuation of Aquila’s interest in West Pilbara, while taking into account the uncertainties and risks that apply to the project, reflects a fundamental assumption that the project can be advanced to development within a reasonable timeframe.
On the basis of Grant Samuel’s estimate of underlying value, the Offer is not fair. The more important question for Aquila shareholders is whether they would be better off accepting the Offer, notwithstanding that it is not fair.
The Bidders have announced that they will not increase the Offer Price. As a result of the “truth in takeovers” principle this is effectively a legally binding commitment.
Aquila shares were trading at levels well below the Offer Price immediately before the Offer was announced. The Offer Price represents a significant premium.
Without the involvement of a major industry participant with substantial funding capacity, Aquila does not have a clear path forward to the financing and development of West Pilbara and does not have the financial and other resources to concurrently progress its other pre-development assets. In this context, given current market conditions, it is to be expected that the share market will not attribute meaningful value to Aquila’s pre-development assets.
Accordingly, in the absence of the Offer or the expectation of some similar transaction, Grant Samuel expects that Aquila shares would trade at prices well below the Offer price. The Aquila share price fell sharply when the Bidders announced that they would not increase the Offer Price. The risk of a further fall in the share price in the absence of the Offer is exacerbated by the recent weakness in the iron ore market, with the benchmark iron ore price having fallen by around 15% since the announcement of the Offer.
Mr Tony Poli, Aquila’s executive chairman, has flagged his intention to accept the Offer in respect of his 28.92% shareholding (in the absence of a superior proposal). Together with Baosteel’s
For personal use only use personal For existing shareholding, this would give the Bidders a shareholding of almost 49% of Aquila and effective control.
These factors suggest that shareholders would be better off accepting the Offer, unless they are willing to take a long term view on the upside from the development of West Pilbara and accept the associated risks.
3
In any event, there are good reasons for shareholders to delay as long as possible their acceptances of the Offer, to provide the maximum opportunity for any alternative proposals to be put forward.
Baosteel’s 19.8% interest in Aquila does not of itself completely rule out a counter-bidder. However, there are realistically only a limited number of parties with the industry experience, financial capacity and motivation to make a credible counter-proposal. MRL made an indicative proposal for an all-scrip acquisition of Aquila, but MRL and Aquila were unable to agree on terms and discussions lapsed. While a counter-offer (from MRL or some third party) remains possible, the prospects of such a counter-offer appear remote.
On balance, in Grant Samuel’s view, in the absence of a superior alternative proposal, shareholders are likely to be better off if they accept the Offer. On this basis, in Grant Samuel’s opinion, the Offer is reasonable.
3 Key Conclusions
. Grant Samuel has valued Aquila in the range $3.90-5.24 per share.
Grant Samuel has valued Aquila in the range $1,608 -2,157 million, which corresponds to a value of $3.90-5.24 per share. The valuation represents the estimated full underlying value of Aquila and includes a premium for control. The value exceeds the price at which, based on current market conditions, Grant Samuel would expect Aquila shares to trade on the ASX in the absence of a takeover offer.
The valuation is summarised below:
Aquila - Valuation Summary1 ($ millions) Value Range Low High Eagle Downs 400 500 West Pilbara 500 700 Washpool 25 50 Avontuur 125 175 Thabazimbi 50 100 Other resources and exploration interests 49 132 Other assets and liabilities 14 44 Corporate costs (net of savings) (45) (35) Enterprise value 1,118 1,666 Net cash as at 31 December 2013 494 494 Value attributable to holders of options and rights (4) (3) Value of equity 1,608 2,157 Shares on issue (million) 411.8 411.8 Value per ordinary share 3.90 5.24
The valuation is based principally on discounted cash flow (“DCF”) analysis, supported where appropriate by benchmark analysis based on comparable transactions.
For personal use only use personal For Grant Samuel appointed AMC Consultants Pty Ltd (“AMC”) as technical specialist to review Aquila’s assets. In relation to Aquila’s development assets (Eagle Downs, West Pilbara, Avontuur and Washpool), AMC’s role included a review of reserves and resources, development plans, production schedules, operating costs, capital costs and exploration potential. AMC also prepared
1 Numbers might not add due to rounding.
4
valuations of Aquila’s other resources and exploration interests. AMC’s report is attached to Grant Samuel’s report.
Grant Samuel’s financial analysis was based on valuation scenarios prepared in conjunction with AMC, reflecting AMC’s judgements regarding the range of assumptions as to ultimate mining inventory, mine life, production rates, capital costs and operating costs that could reasonably be adopted for valuation purposes. The key valuation assumptions adopted were long run hard coking coal prices in the range US$155-165 per tonne (in 2014 real terms) and iron ore 62% Fe benchmark prices (in 2014 real terms) in the range US$80-90 per dry metric tonne (FOB2). The financial models projected cash flows from 1 January 2014 onwards. Present values were estimated using nominal discount rates in the range 9.5-10.5%.
Coal and iron ore prices, exchange rates and expectations regarding future operating performance can change significantly over short periods of time. Such changes can have significant impacts on underlying value.
. Development of the Eagle Downs project has commenced.
Grant Samuel has valued Aquila’s 50% interest in Eagle Downs in the range $400-500 million.
Eagle Downs is located in the Bowen Basin in central Queensland. It has reserves of 254 million tonnes of hard coking coal. Project construction (mainly relating to earthworks and infrastructure) has commenced, with approximately $117 million of capital expenditure incurred to 31 March 2014. Total initial capital expenditure is expected to be of the order of $1.6 billion3, of which Aquila’s share is around $800 million. The project development concept is for a single longwall underground mine, to produce an average of 4.5Mtpa over the first full ten years of production. The total mine life is expected to be 48 years. Coal will be exported by rail, either through the Wiggins Island Coal Export Terminal at Gladstone or through the Dalrymple Bay Coal Terminal.
Given the size of the coal reserve, there is an opportunity to increase production rates through operating two longwalls simultaneously. Preliminary studies suggest that this would lift average annual production over the first ten years of full production to 6.8Mtpa, and reduce the mine life to 29 years.
Grant Samuel’s valuation reflects two valuation scenarios, recommended by AMC, based on the current single longwall development and an expanded two longwall development. At a discount rate of 10.0%, estimated net present values (“NPVs”) for the single longwall scenario (Aquila’s 50% share) are in the approximate range $350-450 million, depending upon assumptions made regarding transport and port arrangements for Eagle Down’s production. Estimated NPVs for the two longwall development are around $600-700 million.
Grant Samuel’s valuation of Eagle Downs in the range $400-500 million focusses on estimated values for the current single longwall development, but includes some modest additional value to reflect the optionality provided by the opportunity for an expanded two longwall development.
. Valuation of the West Pilbara iron ore project is subjective.
Grant Samuel has valued Aquila’s interest in the West Pilbara project in the range $500-700 million.
West Pilbara is a substantial iron ore project, based on reserves of 446 million tonnes of iron ore and
For personal use only use personal For a much larger resource of 2.2 billion tonnes. Aquila has a 50% interest in the joint venture operating the project, with the remaining 50% held by AMCI (25.5% effective interest) and POSCO, a Korean steel maker.
2 US$80-90/dmt FOB corresponds to approximately US$90-100/dmt delivered in China. 3 Estimated capital costs for Eagle Downs are expressed in real 2014 $ terms.
5
The project has attractive investment characteristics. It is located in an established iron ore producing area in a low sovereign risk jurisdiction. Extensive development studies have been undertaken and the project has a relatively large ore reserve available to underpin planned production. Although ore grades are a little lower than benchmark grades, West Pilbara is projected to have bottom quartile cash costs of production, reflecting in part its low waste stripping requirements.
A feasibility study for the development of the project has been completed. The feasibility study contemplates the development of a mining operation based on eight separate deposits, the construction of a 30Mtpa central processing facility, the building of a 282km railway and the construction of a multi-user deep water port at Anketell Point, near Cape Lambert. The estimated pre-production capital costs are $7.4 billion, of which $5.7 billion relates to the railway line and port facility.
Work has also been undertaken on a development concept based on higher production rates. Estimates suggest that production capacity could be increased to 45Mtpa with relatively little increase in up front capital costs (the estimated incremental capital costs are around $600 million). The extensive resource base should support a long life operation, and there would be an opportunity to extract additional value by providing access to the rail and port infrastructure to third party owners of iron ore resources that would otherwise be stranded. Given the potentially modest incremental capital expenditure required to increase the project’s capacity, the economics of a higher capacity development appear compelling. Accordingly, it seems likely that the development concept finally adopted will be for production volumes well above the feasibility study assumption of 30Mtpa.
Grant Samuel’s valuation reflects two valuation scenarios, recommended by AMC, based on the feasibility study (30Mtpa production - Case 1) and an expanded 45Mtpa development (Case 2). Based on discount rates in the range 9.5-10.5%, the estimated net present values for these scenarios (Aquila’s 50% share) are set out below:
West Pilbara – Results of Financial Analysis (Aquila’s Interest) LT Iron Ore Price Scenarios (62%, FOB Pilbara) $ million Discount rate US$80/dmt US$85/dmt US$90/dmt Case 1 9.5% 601 851 1,086 10.0% 446 682 905 10.5% 305 528 739 Case 2 9.5% 1,351 1,688 2,024 10.0% 1,146 1,466 1,783 10.5% 958 1,261 1,562
The valuation scenarios assume that production runs for 15 years only. This would leave a substantial resource base (of the order of 1.5 billion tonnes) still to be exploited. The railway and port infrastructure have very long useful lives. The reality is that the project would continue for many years beyond the initial 15 years assumed in the DCF analysis. AMC has valued the residual resources (i.e. those assumed not be exploited in the two valuation scenarios), having regard to benchmarks based on transactions involving undeveloped iron ore resources. For the 30Mtpa scenario, AMC’s valuation of the residual resources is $159-429 million. For the 45Mtpa scenario, AMC’s valuation of the residual resources is $101-341 million. As an alternative, Grant Samuel has
For personal use only use personal For estimated the incremental net present values that could be delivered through extension of the operations for a total life of 50 years. Although no more than indicative, this analysis suggests that extending the project life could add significantly more value than suggested by AMC’s valuation of the residual resources.
The valuation of pre-development projects is inevitably subjective, given that there is no generally accepted basis for quantifying or adjusting for the development and other risks. Grant Samuel’s valuation of Aquila’s interest in West Pilbara in the range $500-700 million represents (at the bottom end of the range) only around 75% of the mid-point NPV for the 30Mtpa scenario and less
6
than 35% of the mid-point NPV for the 45Mtpa scenario. Moreover, it effectively largely discounts the significant additional value likely to be achieved through an extension of the project’s life beyond the initial fifteen year period.
The valuation range reflects the following factors:
. Aquila’s interest in West Pilbara is by way of a 50% joint venture interest, rather than through a holding that delivers unfettered control. The basis for development of the project, including financing, needs to be negotiated with Aquila’s joint venture partners. Differing objectives, time horizons, risk appetites and funding capacities as between the joint venture partners may make it difficult to reach agreement on how to take the development forward and result in delays in project construction;
. the DCF analysis suggests that the project offers sound economics. Nonetheless, the volume of funding required for the up-front capital expenditure (of the order of $7.5-8.0 billion) is such that financing may be challenging. The DCF analysis assumes that the project participants finance and retain control of all aspect of the operation, including the rail and port infrastructure. In reality, depending on the ownership of the project at the time of development, it may be preferable (or necessary) to source third party equity funding for some or all of the infrastructure, which would result in third parties capturing some of the value estimated in the DCF analysis;
. additional work is required to fully define the project parameters (particularly for a higher production capacity development). The project (while not subject to any obvious unusual technical risks) is subject to development risk. The majority of the approvals required for the project are in hand, but a small number are still outstanding. In recent times a number of large scale Australian resources projects have experienced major cost overruns, although there now appears to be less pressure on costs than in recent years;
. on the other hand, through their takeover offer for Aquila, Baosteel and Aurizon are clearly signalling their view that joint venture issues can and will be resolved, that the project is financeable on commercial terms and that it can be developed on a basis that delivers acceptable commercial returns.
. The Offer is not fair.
Grant Samuel has valued Aquila in the range $3.90-5.24 per share. The Offer Price of $3.40 cash per share falls below the bottom end of the valuation range for Aquila. Accordingly, the Offer is not fair.
. The Offer is reasonable.
An offer can be reasonable, even if it is not fair, if there are compelling reasons to accept it. There are a number of factors that suggest that the Offer by Baosteel and Aurizon is attractive to shareholders.
The Offer Price represents a significant premium to the price at which Aquila shares were trading before the announcement of the Offer:
Offer Price – Implied Premiums at Announcement
For personal use only use personal For Date/Period Aquila Share Price ($) Premium Closing pre-announcement price 2.45 39% 1 day VWAP 2.44 40% 5 day VWAP 2.46 38% 1 month VWAP 2.61 31% 3 month VWAP 2.57 32% Source: IRESS and Grant Samuel analysis
7
The premium relative to the Aquila share price in the week before the announcement of the Offer (in the range 38-40%) is at the high end of the range of premiums normally paid in takeovers or other change of control transactions.
A key issue for shareholders in assessing whether to accept or reject the Offer is the price at which Aquila shares could be expected to trade in the absence of the Offer. In this regard:
. Aquila shares were trading at well below the Offer Price before the announcement of the Offer;
. the nature of Aquila’s asset base, with first production from Eagle Downs not expected before 2017 and potentially longer development timetables for its other assets, is not attractive to a share market that is focussed on earnings and yield; and
. given the structure of Aquila’s register, with only around 25% of the shares on issue available as free float, trading in Aquila shares is relatively illiquid, which would also tend to depress the market price.
On the other hand:
. the Offer and the information released in Aquila’s response to the Offer may result in a market re-assessment of the value of Aquila’s assets;
. in particular, the Offer represents an endorsement by well-credentialed participants in the iron/steel and transport sectors of the West Pilbara iron ore project; and
. MRL’s acquisition of a 12.78 % shareholding in Aquila at prices around $3.75 and subsequent indicative takeover proposal at the same price arguably suggest that MRL, a relatively sophisticated participant in the iron ore sector, sees value in Aquila shares at prices above the Offer Price. (It may be the case that MRL’s interest is focussed on participation in the construction and operation of the West Pilbara project, rather than being a reflection of its view on the value of Aquila.)
Aquila’s share price fell significantly when the Bidders announced that they would not increase the Offer Price. The risk of a significant further fall in the Aquila share price in the absence of the Offer is exacerbated by the current weakness in the iron ore market, with the benchmark iron ore price having fallen by around 15% since the announcement of the Offer.
Overall, in Grant Samuel’s view, in the absence of the Offer or expectations of a similar proposal, Aquila shares are likely (at least in the short term) to trade at prices well below the Offer Price. Aquila shareholders would be unlikely to realise the value delivered by the Offer (assuming the continuation of current market conditions) through selling their Aquila shares in the ordinary course of share market trading.
Shareholders with no requirement for short term liquidity and a positive view on the West Pilbara project and the iron ore market could choose to reject the Offer in the expectation that development of the West Pilbara project could deliver greater value in the medium to longer term. In Grant Samuel’s opinion, however, such a course of action would expose shareholders to significant risks. Pending the resolution of the Offer, there could be no certainty as to whether and when West Pilbara would be developed. If the Offer was successful but the Bidders failed to acquire sufficient shares to be entitled to compulsorily acquire all outstanding shares, non-accepting shareholders would find themselves as minority shareholders in a company with potentially very limited share liquidity. In For personal use only use personal For those circumstances (given current market conditions) there would be a risk that Aquila shares would trade at prices materially lower than the Offer Price.
8
Evaluation of the Offer also requires an assessment as to whether there is a realistic prospect of a superior proposal:
. the Bidders have publicly stated that they will not increase the Offer Price. The “truth in takeovers” principle means that they are effectively now legally prevented from increasing the Offer Price;
. the Bidders could conceivably allow the current Offer to lapse and then subsequently return with a new (and possibly higher) offer, but shareholders could not realistically have any confidence that this would eventuate.
. on the other hand, Baosteel’s existing 19.8% shareholding is not of itself sufficient to prevent a counter-offer from a third party;
. there are realistically only a limited number of parties with the financial capacity, industry experience and motivation to make a credible counter-offer. Aquila received an indicative all- scrip proposal from MRL with a nominal value equivalent to $3.75 per share, but the parties were unable to agree on acceptable terms. MRL acquired its 12.78% interest in Aquila at prices around $3.75 per share and any further proposal that it might make would have to be at least at that price. The key issue in relation to any counter-proposal from MRL would relate to its ability to demonstrate a clear path to the financing of the development of West Pilbara. While a counter-offer (from MRL or some third party) cannot be completely ruled out, the prospects of such a counter-offer appear remote.
In considering the Offer, Aquila shareholders should also have regard to the position of its major shareholders. Aquila’s three largest shareholders (other than Baosteel) jointly hold around 52% of Aquila’s shares on issue. These three shareholders are Mr Tony Poli, Mr Charles Bass, Aquila co- founder, and MRL. Mr Poli has stated that he intends to accept the Offer (in the absence of a superior offer and subject to his reserving his right to revisit this). Acceptance of the Offer by Mr Poli would give the Bidders a shareholding of nearly 49%, delivering effective control and almost certainly guaranteeing that the 50% minimum acceptance condition would be fulfilled.
In this context, there are good reasons for shareholders who choose to accept the Offer to delay their acceptances as long as possible, both to provide the maximum opportunity for any counter-proposal to be put forward and to allow on-going consideration of the position of the major shareholders in relation to the Offer.
Aquila shares are likely to trade at prices well below the Offer Price in the absence of the Offer. There is essentially no prospect of a higher offer from the Bidders. While a superior proposal from some third party (potentially MRL) cannot be completely ruled out, there can be no confidence that such a proposal will be forthcoming. In Grant Samuel’s view, in the absence of a superior offer, Aquila shareholders will be better off accepting the Offer. Accordingly, in Grant Samuel’s opinion, the Offer, while not fair, is reasonable.
For personal use only use personal For
9
4 Other Matters
This report is general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of individual Aquila shareholders. Accordingly, before acting in relation to their investment, shareholders should consider the appropriateness of the advice having regard to their own objectives, financial situation or needs. Shareholders should read the Bidders’ Statement and the Target’s Statement issued by Aquila in relation to the Offer.
A decision as to whether to accept the Offer is a matter for individual shareholders, based on their own views as to value, their expectations about future market conditions and their particular circumstances including risk profile, liquidity preference, investment strategy, portfolio structure and tax position. Shareholders who are in doubt as to the action they should take in relation to the Offer should consult their own professional adviser.
Similarly, it is a matter for individual shareholders as to whether to buy, hold or sell securities in Aquila. This is an investment decision upon which Grant Samuel does not offer an opinion and is independent of a decision on whether to accept the Offer. Shareholders should consult their own professional adviser in this regard.
Grant Samuel has prepared a Financial Services Guide as required by the Corporations Act, 2001. The Financial Services Guide is included at the beginning of the full report.
This letter is a summary of Grant Samuel’s opinion. The full report from which this summary has been extracted is attached and should be read in conjunction with this summary.
The opinion is made as at the date of this letter and reflects circumstances and conditions as at that date.
Yours faithfully GRANT SAMUEL & ASSOCIATES PTY LIMITED
For personal use only use personal For
10
Financial Services Guide and Independent Expert’s Report in relation to the Takeover Offer by Baosteel Resources Australia Pty Ltd and Aurizon Operations Limited
For personal use only use personal For Grant Samuel & Associates Pty Limited (ABN 28 050 036 372)
20 June 2014
GRANT SAMUEL & ASSOC IATES
L E V E L 6
1 COLLINS STREET MELBO U R N E V IC 3 0 0 0
T : + 6 1 3 9 949 8800 / F : + 6 1 3 9949 8838
www.grantsamuel.com.au
Financial Services Guide
Grant Samuel & Associates Pty Limited (“Grant Samuel”) holds Australian Financial Services Licence No. 240985 authorising it to provide financial product advice on securities and interests in managed investments schemes to wholesale and retail clients. The Corporations Act, 2001 requires Grant Samuel to provide this Financial Services Guide (“FSG”) in connection with its provision of an independent expert’s report (“Report”) which is included in a document (“Disclosure Document”) provided to members by the company or other entity (“Entity”) for which Grant Samuel prepares the Report. Grant Samuel does not accept instructions from retail clients. Grant Samuel provides no financial services directly to retail clients and receives no remuneration from retail clients for financial services. Grant Samuel does not provide any personal retail financial product advice to retail investors nor does it provide market-related advice to retail investors. When providing Reports, Grant Samuel’s client is the Entity to which it provides the Report. Grant Samuel receives its remuneration from the Entity. In respect of the Report for Aquila Resources Limited (“Aquila”) in relation to the takeover offer by Baosteel Resources Australia Pty Ltd and Aurizon Operations Limited for all the shares in Aquila that they do not already own (“the Aquila Report”), Grant Samuel will receive a fixed fee of $500,000 plus reimbursement of certain out-of-pocket expenses for the preparation of the Report (as stated in Section 7.3 of the Aquila Report). No related body corporate of Grant Samuel, or any of the directors or employees of Grant Samuel or of any of those related bodies or any associate receives any remuneration or other benefit attributable to the preparation and provision of the Aquila Report. Grant Samuel is required to be independent of the Entity in order to provide a Report. The guidelines for independence in the preparation of Reports are set out in Regulatory Guide 112 issued by the Australian Securities & Investments Commission on 30 March 2011. The following information in relation to the independence of Grant Samuel is stated in Section 7.3 of the Aquila Report:
“Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any business or professional relationship with Aquila, Baosteel or Aurizon or any financial or other interest that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Offer.
Grant Samuel will receive a fixed fee of $500,000 for the preparation of this report. This fee is not contingent on the conclusions reached or the outcome of the Offer. Certain of Grant Samuel’s out of pocket expenses in relation to the preparation of the report will be reimbursed. Grant Samuel will receive no other benefit for the preparation of this report.
Grant Samuel considers itself to be independent in terms of Regulatory Guide 112 issued by ASIC on 30 March 2011.”
Grant Samuel has internal complaints-handling mechanisms and is a member of the Financial Ombudsman Service, No. 11929. If you have any concerns regarding the Aquila Report, please contact the Compliance Officer in writing at Level 19, Governor Macquarie Tower, 1 Farrer Place, Sydney NSW 2000. If you are not satisfied with how we respond, you may contact the Financial Ombudsman Service at GPO Box 3 Melbourne VIC 3001 or 1300 780 808. This service is provided free of charge. Grant Samuel holds professional indemnity insurance which satisfies the compensation requirements of the Corporations Act, 2001. Grant Samuel is only responsible for the Aquila Report and this FSG. Complaints or questions about the Disclosure Document should not be directed to Grant Samuel which is not responsible for that document. Grant Samuel will not respond in any way
that might involve any provision of financial product advice to any retail investor. For personal use only use personal For
GRANT SAMUEL & ASSOC IATES PTY LIMITED
ABN 28 050 036 372 A FS LICENCE NO 240985
Table of Contents
1 Details of the Offer ...... 1
2 Scope of the Report ...... 3 2.1 Purpose of the Report ...... 3 2.2 Basis of Evaluation ...... 3 2.3 Sources of the Information ...... 4 2.4 Limitations and Reliance on Information ...... 5
3 Profile of Aquila ...... 8 3.1 Background ...... 8 3.2 Financial Performance ...... 8 3.3 Financial Position ...... 10 3.4 Cash Flow ...... 11 3.5 Taxation Position ...... 12 3.6 Capital Structure and Ownership...... 12 3.7 Share Price Performance ...... 14
4 Profile of Aquila’s Assets ...... 17 4.1 Eagle Downs ...... 17 4.2 Washpool ...... 20 4.3 West Pilbara ...... 22 4.4 Avontuur ...... 27 4.5 Exploration...... 30
5 Valuation of Aquila ...... 35 5.1 Summary ...... 35 5.2 Methodology ...... 36 5.3 Resources Projects and Optionality ...... 38 5.4 Valuation Assumptions ...... 39 5.5 Valuation of Aquila’s Mining Assets ...... 42 5.6 Other Assets and Liabilities ...... 61 5.7 Head Office Costs ...... 61 5.8 Net Cash ...... 62 5.9 Options and Rights...... 62
6 Evaluation of the Offer ...... 63 6.1 Conclusion ...... 63 6.2 Fairness ...... 64 6.3 Reasonableness ...... 64 6.4 Shareholder Decision ...... 67
7 Qualifications, Declarations and Consents ...... 69 7.1 Qualifications ...... 69 7.2 Disclaimers ...... 69 7.3 Independence ...... 69 7.4 Declarations...... 69 7.5 Consents ...... 70 7.6 Other ...... 70 For personal use only use personal For Appendices
1 Overview of the Coal, Iron Ore and Manganese Markets 2 Selection of Discount Rates 3 Market Evidence - Coal Transactions and Listed Companies 4 Market Evidence - Manganese Transactions 5 Report by AMC Consultants Pty Ltd
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
For personal use only use personal For
1 Details of the Offer
On 5 May 2014, Baosteel Resources Australia Pty Ltd (“Baosteel”) and Aurizon Operations Limited (“Aurizon”) (together the “Bidders”) announced their intention to make a joint off-market takeover offer for all the ordinary shares in Aquila Resources Limited (“Aquila”) that the Bidders did not already own (the “Offer”). The consideration under the Offer is $3.40 cash per ordinary Aquila share (“Offer Price”).
The Baosteel and Aurizon Bidders’ Statement was lodged with the Australian Securities and Investments Commission (“ASIC”) on 14 May 2014 and dispatched to Aquila shareholders on 5 June 2014.
On 12 June 2014, Mineral Resources Limited (“MRL”) announced that it had acquired 52.64 million shares in Aquila, representing 12.78% of Aquila’s shares on issue, and that it was interested in participating in the development of West Pilbara. The majority of MRL’s shares in Aquila were acquired at a price of $3.75 per share. MRL is a Western Australian based company that is focussed on the mining, processing and export of bulk commodities, the provision of contract processing and other specialist mining services, and pipeline engineering. At 17 June 2014, it had a market capitalisation of $1.8 billion.
On 13 June 2014, the Bidders announced that they would not increase the Offer Price and that the offer period would not be extended beyond the scheduled closing date of 11 July 2014, unless the Offer had become unconditional before then.
On 18 June 2014, Aquila announced that it had received an indicative proposal from MRL for an all-scrip takeover offer for Aquila. Aquila stated that the parties had been unable to agree on terms that were acceptable to both Aquila and MRL, and that the discussions between the parties had ceased. The announcement also stated that Aquila’s executive chairman, Mr Tony Poli, who has a relevant interest in Aquila of 28.92%, intends to accept the Offer in the absence of a superior proposal (while reserving his right to revisit this).
Baosteel and Aurizon have agreed that if they together acquire between 50% and 90% of Aquila, Aurizon will be allocated 10% of the shares in Aquila and Baosteel the balance. If they reach compulsory acquisition and acquire 100% of Aquila, Aurizon will be allocated 15% of the shares. Aurizon’s objective is to develop, own and operate the iron ore rail and port infrastructure that would be required to take the iron ore from Aquila’s West Pilbara Iron Ore Project to market.
The Offer extends to all the shares issued before the end of the Offer period pursuant to the exercise of Aquila options, performance rights or share appreciation rights but Baosteel and Aurizon are not offering to acquire any of the Aquila options, performance rights or share appreciation rights.
Baosteel is a wholly-owned subsidiary of Baosteel Resources International Co., Ltd, the overseas resources development arm of Baosteel Group, a state-owned enterprise and one of China’s largest steelmakers. At the time of the 5 May 2014 announcement, Baosteel had a 19.8% interest in Aquila.
Aurizon is a wholly-owned subsidiary of Aurizon Holdings Limited, Australia’s largest rail freight operator, which is listed on the Australian Securities Exchange (“ASX”) and had a market capitalisation of approximately $10.5 billion on 5 May 2014.
The Offer is subject to the satisfaction of a number of conditions which are set out in full in the Bidder’s Statement. In summary, these include:
For personal use only use personal For . that, by the end of the offer period, the Bidders and their associates have relevant interests in at least 50% of Aquila shares on issue1;
1 Including shares that may be issued on exercise or vesting of Aquila options, Performance Rights and Share Appreciation Rights.
1
. that both Baosteel and Aurizon have received approval from the Australian Foreign Investment Review Board (“FIRB”) prior to the end of the offer period. Aquila announced on 29 May 2014 that Baosteel and Aurizon had received FIRB approval;
. that between the announcement date and the end of the offer period no distribution or dividend is declared or paid by Aquila;
. conditions in relation to material acquisitions or disposals, new arrangements relating to infrastructure development or services at Aquila’s iron ore project and change of control provisions affecting Aquila’s material assets;
. that there are no prescribed occurrences for Aquila (as defined in the Bidder’s Statement); and . that there is no “material adverse change” (as defined in the Bidder’s Statement).
The offer is not subject to any Chinese regulatory approvals or financing conditions. For personal use only use personal For
2
2 Scope of the Report
2.1 Purpose of the Report
Section 640 of the Corporations Act, 2001 (“Corporations Act”) states that a target’s statement made in response to a takeover offer for shares in an Australian listed entity must be accompanied by an independent expert’s report if: . the bidder’s voting power in the target is 30% of more; or . a director of the bidder is also a director of the target company.
In this case, Mr Zhaoming Lu, a director of Aquila, is vice president of Baosteel Resources Co. Ltd. Accordingly, the directors of Aquila not associated with Baosteel or Aurizon (“the independent directors”) have engaged Grant Samuel & Associates Pty Limited (“Grant Samuel”) to prepare an independent expert’s report for the purposes of Section 640 of the Corporations Act. The report is to set out Grant Samuel’s opinion as to whether the Offer is fair and reasonable and to state reasons for that opinion.
This report is general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of individual Aquila shareholders. Accordingly, before acting in relation to their investment, shareholders should consider the appropriateness of the advice having regard to their own objectives, financial situation or needs. Shareholders should read the Bidder’s Statement issued by Baosteel and Aurizon and the Target’s Statement issued by Aquila in relation to the Offer.
Whether or not to accept the Offer is a matter for individual shareholders based on their views as to value, their expectations about future market conditions and their particular circumstances including risk profile, liquidity preference, investment strategy, portfolio structure and tax position. Shareholders who are in doubt as to the action they should take in relation to the Offer should consult their own professional adviser.
Similarly, it is a matter for individual shareholders as to whether to buy, hold or sell securities in Aquila or Aurizon. These are investment decisions upon which Grant Samuel does not offer an opinion and independent of a decision on whether to accept the Offer. Shareholders should consult their own professional adviser in this regard.
2.2 Basis of Evaluation
The term “fair and reasonable” has no legal definition although over time a commonly accepted interpretation has evolved. However, ASIC has issued Regulatory Guide 111 which establishes guidelines in respect of independent expert’s reports. ASIC Regulatory Guide 111 differentiates between the analysis required for control transactions and other transactions. In the context of control transactions (whether by takeover bid, by scheme of arrangement, by the issue of securities or by selective capital reduction or buyback), the expert is required to distinguish between “fair” and “reasonable”.
Fairness involves a comparison of the offer price with the value that may be attributed to the securities that are the subject of the offer based on the value of the underlying businesses and assets. For this comparison, value is determined assuming 100% ownership of the target and a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not
For personal use only use personal For anxious, seller acting at arm’s length. Reasonableness involves an analysis of other factors that shareholders might consider prior to accepting an offer such as: . the offeror’s existing shareholding; . other significant shareholdings; . the probability of an alternative offer; and
3
. the liquidity of the market for the target company’s shares.
An offer could be considered “reasonable” if there were valid reasons to accept the offer notwithstanding that it was not “fair”.
Fairness is a more demanding criteria. A “fair” offer will always be “reasonable” but a “reasonable” offer will not necessarily be “fair”. A fair offer is one that reflects the full market value of a company’s businesses and assets. An offer that is in excess of the pre-bid market prices but less than full value will not be fair but may be reasonable if shareholders are otherwise unlikely in the foreseeable future to realise an amount for their shares in excess of the offer price. This is commonly the case where the bidder already controls the target company. In that situation the minority shareholders have little prospect of receiving full value from a third party offeror unless the controlling shareholder is prepared to sell its controlling shareholding.
Grant Samuel has determined whether the Offer is fair by comparing the estimated underlying value range of Aquila with the offer price. The Offer will be fair if it falls within the estimated underlying value range. In considering whether the Offer is reasonable, the factors that have been considered include: . the estimated value of Aquila compared to the offer price; . the existing shareholding structure of Aquila; . the likelihood of an alternative offer and alternative transactions that could realise fair value; . the likely market price and liquidity of Aquila shares in the absence of the Offer; and . other advantages and disadvantages for Aquila shareholders of accepting the Offer.
2.3 Sources of the Information
The following information was utilised and relied upon, without independent verification, in preparing this report:
Publicly Available Information . the Bidder’s Statement; . the Target’s Statement (including earlier drafts); . annual reports of Aquila for the two years ended 30 June 2013; . half year announcement of Aquila for the six months ended 31 December 2013; . quarterly reports for the three quarters ended 31 March 2014; . press releases, public announcements, media and analyst presentation material and other public filings by Aquila including information available on its website; . brokers’ reports and recent press articles on Aquila and the coking coal, iron ore and manganese industries; . sharemarket data and related information on Australian and international listed companies engaged in the coking coal, iron ore and manganese industries and on acquisitions of
companies and businesses in these industries; and For personal use only use personal For . information relating to the Australian and international coking coal, iron ore and manganese industries including supply/demand forecasts and regulatory decisions and pronouncements (as appropriate).
4
Non Public Information provided by Aquila . studies and other technical information relating to Aquila’s assets; . detailed cash flows models including projections for Aquila’s operations; and . other documents, board papers, presentations and working papers.
In preparing this report, representatives of Grant Samuel held discussions with, and obtained information from, senior management of Aquila and its advisers.
2.4 Limitations and Reliance on Information
Grant Samuel believes that its opinion must be considered as a whole and that selecting portions of the analysis or factors considered by it, without considering all factors and analyses together, could create a misleading view of the process employed and the conclusions reached. Any attempt to do so could lead to undue emphasis on a particular factor or analysis. The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary.
Grant Samuel’s opinion is based on economic, sharemarket, business trading, financial and other conditions and expectations prevailing at the date of this report. These conditions can change significantly over relatively short periods of time. If they did change materially, subsequent to the date of this report, the opinion could be different in these changed circumstances.
This report is also based upon financial and other information provided by Aquila and its advisers. Grant Samuel has considered and relied upon this information. Aquila has represented in writing to Grant Samuel that to its knowledge the information provided by it was then, and is now, complete and not incorrect or misleading in any material respect. Grant Samuel has no reason to believe that any material facts have been withheld.
The information provided to Grant Samuel has been evaluated through analysis, inquiry and review to the extent that it considers necessary or appropriate for the purposes of forming an opinion as to whether the Offer is fair and reasonable to Aquila shareholders. However, Grant Samuel does not warrant that its inquiries have identified or verified all of the matters that an audit, extensive examination or “due diligence” investigation might disclose. While Grant Samuel has made what it considers to be appropriate inquiries for the purposes of forming its opinion, “due diligence” of the type undertaken by companies and their advisers in relation to, for example, prospectuses or profit forecasts, is beyond the scope of an independent expert. It is not in a position nor is it practicable to undertake its own “due diligence” investigation of the type undertaken by accountants, lawyers or other advisers.
Accordingly, this report and the opinions expressed in it should be considered more in the nature of an overall review of the anticipated commercial and financial implications rather than a comprehensive audit or investigation of detailed matters.
An important part of the information used in forming an opinion of the kind expressed in this report is comprised of the opinions and judgement of management. This type of information was also evaluated through analysis, inquiry and review to the extent practical. However, such information is often not capable of external verification or validation.
Preparation of this report does not imply that Grant Samuel has audited in any way the
For personal use only use personal For management accounts or other records of Aquila. It is understood that the accounting information that was provided was prepared in accordance with generally accepted accounting principles and in a manner consistent with the method of accounting in previous years (except where noted).
The information provided to Grant Samuel included: . the budget for Aquila for the year ending 30 June 2014 (“2014 Budget”) prepared by management and adopted by the directors of Aquila; and
5
. life of mine plans, project development plans, feasibility studies, and scoping studies (collectively “forward looking information”) for Aquila’s various development and earlier stage projects.
Aquila is responsible for the information contained in the forward looking information. Grant Samuel has no reason to believe that the forward looking information reflects any material bias, either positive or negative. However, the achievability of the outcomes implicit in the forward looking information is not warranted or guaranteed by Grant Samuel. Future profits and cash flows are inherently uncertain. They are predictions by management of future events that cannot be assured and are necessarily based on assumptions, many of which are beyond the control of the company or its management. Actual results may be significantly more or less favourable.
AMC Consultants Pty Ltd (“AMC”) was appointed as technical specialist to review the assets of Aquila for Grant Samuel. AMC conducted a detailed review of the significant assumptions and technical factors underlying the forward looking information provided by Aquila to AMC and Grant Samuel. This review included a review of the basis on which resources and reserves have been estimated, a review of likely future operating and capital costs, a review of likely future production rates, a review of the potential for the conversion of resources to reserves and the potential to mine mineralisation not currently in reserves, a review of environmental factors and such other reviews as AMC deemed appropriate. Having regard to these reviews, AMC made independent judgements regarding the technical assumptions that can reasonably be adopted for the purposes of the valuation of the assets of Aquila (“technical valuation assumptions”). In addition, AMC prepared valuations of the exploration interests of Aquila and of certain other assets for which is it not deemed appropriate to prepare cash flow based valuations. The basis and extent of AMC’s review, the technical valuation assumptions recommended by AMC and AMC’s valuations of Aquila’s valuation interests and certain other assets are set out in a report from AMC, which is appended to Grant Samuel’s report.
As part of its analysis, Grant Samuel has developed cash flow models on the basis of the technical valuation assumptions deemed appropriate by AMC. Grant Samuel has reviewed the sensitivity of net present values to changes in key variables. The sensitivity analysis isolates a limited number of assumptions and shows the impact of the expressed variations to those assumptions. No opinion is expressed as to the probability or otherwise of those expressed variations occurring. Actual variations may be greater or less than those modelled. In addition to not representing best and worst case outcomes, the sensitivity analysis does not, and does not purport to, show all the possible variations to the business model. The actual performance of the business may be negatively or positively impacted by a range of factors including, but not limited to: . changes to the assumptions other than those considered in the sensitivity analysis; . variations to the assumptions considered in the sensitivity analysis that are greater or less than those modelled; and . combinations of different assumptions that may produce outcomes different from those modelled.
In forming its opinion, Grant Samuel has also assumed that: . matters such as title, compliance with laws and regulations and contracts in place are in good standing and will remain so and that there are no material legal proceedings, other than as publicly disclosed; For personal use only use personal For . the assessments by Aquila and its advisers with regard to legal, regulatory, tax and accounting matters relating to the transaction are accurate and complete; . the information set out in the Target’s Statement sent by Aquila to its shareholders is complete, accurate and fairly presented in all material respects; . the publicly available information relied on by Grant Samuel in its analysis was accurate and not misleading;
6
. the Offer will be implemented in accordance with its terms; and . the legal mechanisms to implement the Offer are correct and will be effective.
To the extent that there are legal issues relating to assets, properties, or business interests or issues relating to compliance with applicable laws, regulations, and policies, Grant Samuel assumes no
responsibility and offers no legal opinion or interpretation on any issue. For personal use only use personal For
7
3 Profile of Aquila
3.1 Background
Aquila is a Perth based resources company with interests in iron ore, coal and manganese projects in Australia and South Africa. Founded by Tony Poli, the current executive chairman and CEO of the company, and Charles Bass, Aquila listed on the ASX in June 2000. Aquila had a market capitalisation of approximately $1.0 billion immediately before the announcement of the Offer on 5 May 2014.
Following the sale of Aquila’s interest in the Isaac Plains coal mine to Sumitomo Corporation in July 2012 and of its remaining interest in the Belvedere Hard Coking Coal Project to Vale in February 2013, the company now owns the following portfolio of development and exploration projects:
Aquila – Asset Overview Reserves Resources Asset Interest Location (Mt) (Mt) Status Coal Eagle Downs Hard 50% Bowen Basin, 254 959 Under construction Coking Coal Project Queensland Washpool Hard 100% Bowen Basin, 108.3 196.7 Definitive feasibility Coking Coal Project Queensland study completed Talwood Coking 100% Bowen Basin, - 434.9 Concept study Coal Project Queensland completed Walton PCI Coal 100% Bowen Basin, - 46.6 Pre-concept study Project Queensland completed Iron Ore West Pilbara Iron Ore 50%2 West Pilbara, 445 2,233 Feasibility study Project Western Australia completed Thabazimbi Iron Ore 74% Limpopo Province, - 80.8 Scoping study Project South Africa completed Northern Cape Iron 74% Northern Cape Province, - - Early exploration Ore Project South Africa Manganese Avontuur Manganese 74% Northern Cape Province, 20.2 141.7 Definitive feasibility Project South Africa study completed Source: Aquila
Aquila and Vale Group (“Vale”) are developing the Eagle Downs Hard Coking Coal Project (“Eagle Downs”) through the 50:50 Bowen Central Coal joint venture (“BCCJV”). First production is targeted for 2017.
The West Pilbara Iron Ore Project (“West Pilbara” or “WPIOP”) is owned by the Australian Premium Iron joint venture (“API JV”), which is an unincorporated joint venture between Aquila’s wholly-owned subsidiary Aquila Steel (50%) and AMCI (IO) Pty Ltd (50%), an entity owned 51% by American Metals & Coal International, Inc., a resource investment company, and the Korean steelmaker POSCO (49%).
For personal use only use personal For 3.2 Financial Performance
The financial performance of Aquila for the three years ended 30 June 2013 and for the six months ended 31 December 2013 is summarised below:
2 Aquila holds a 50% interest in the joint venture that operates the project and holds majority stakes in the project’s components. Refer to section 4.3 for more details on the ownership structure of the West Pilbara Iron Ore Project.
8
Aquila - Financial Performance ($ millions) Six months to
Year ended 30 June 31 December 2011 2012 2013 2013
actual actual actual actual Attributable coal sales (million tonnes) 0.78 1.26 - - Total sales revenue 133.5 197.1 - - Gross profit 29.7 42.9 - - Corporate, legal and administrative (10.9) (23.7) (26.5) (7.2) expenses Exploration and evaluation expenses (13.1) (14.9) (12.6) (3.4) EBITDA3 5.6 4.3 (39.1) (10.6) Depreciation and amortisation (8.1) (9.2) (1.4) (0.5) EBIT4 (2.5) (4.9) (40.5) (11.1) Net interest income 11.9 5.1 20.0 10.0 Impairment loss and foreign exchange loss (4.1) 0.1 (15.5) (1.0) Net gain on sale of project interests and - 0.5 490.9 - exploration assets Other income 0.5 0.4 0.6 0.6 Operating profit / (loss) before tax 5.9 1.1 455.5 (1.6) Income tax benefit / (expense) (2.8) (1.4) (138.0) 1.0 Operating profit / (loss) after tax 3.1 (0.2) 317.5 (0.6) Outside equity interests - - - - Profit / (loss) after tax attributable to 3.1 (0.2) 317.5 (0.6) Aquila shareholders
Basic earnings per share ($) 0.01 (0.00) 0.77 (0.00) Source: Aquila and Grant Samuel analysis
The following should be noted in relation to Aquila’s financial performance over the last three years: . Aquila’s sales revenue in the 2011 and 2012 financial years was its share of coal sales from the Isaac Plains coal mine; . Aquila’s financial performance for the 18 months to 31 December 2013 reflects the company’s focus on development and exploration activities following the sale of its 50% interest in the Isaac Plains coal mine in July 2012; . the net gain on sale of $490.9 million reported in the 2013 financial relates to the sale of the company’s interests in Isaac Plains ($339m) and the sale of the Belvedere coal project in February 2013 ($152m); and . exploration and evaluation expenses relate to exploration expenditure incurred prior to the definition of a JORC compliant resource in the relevant area.
With Eagle Downs not expected to commence production before 2017, Aquila does not expect to report sales revenue in the near to medium term.
For personal use only use personal For
3 EBITDA is earnings before net interest, tax, depreciation and amortisation, investment income and significant and non-recurring items. 4 EBIT is earnings before net interest, tax, investment income and significant and non-recurring items.
9
3.3 Financial Position
The financial position of Aquila as at 30 June 2013 and at 31 December 2013 is summarised below:
Aquila - Financial Position ($ millions) 30 June 2013 31 December 2013 Debtors and prepayments 2.7 2.5 Inventories - - Creditors, accruals and provisions (16.5) (8.1) Net operating working capital (13.7) (5.6) Exploration and evaluation assets 281.0 285.2 Property, plant and equipment (net) 115.6 120.9 Other intangible assets (net) 5.2 5.1 Tax payable (66.9) - Deferred tax liabilities (net) (85.4) (85.2) Investments 9.2 10.2 Other assets / (liabilities) (net) 0.3 0.9 Total funds employed 245.3 331.5 Cash and deposits 591.4 505.4 Bank loans, other loans and finance leases (11.4) (11.3) Net cash 580.0 494.1 Net assets 825.3 825.6 Outside equity interests - - Equity attributable to Aquila shareholders 825.3 825.6 Statistics Shares on issue at period end (million) 411.8 411.8 Net assets per share 2.0 2.0 NTA5 per share 2.0 2.0 Source: Aquila and Grant Samuel analysis
The following should be noted in relation to Aquila’s financial position as at 30 June 2013 and at 31 December 2013: . Aquila has a strong balance sheet. As at 31 December 2013, the company reported net cash of $494.1 million with no bank debt. In addition, the company had investments in listed equities valued at $10.2 million as at 31 December 2013; . Aquila’s significant non-cash assets on the balance sheet as at 31 December 2013 related to: West Pilbara, with a carrying value of $228.3 million;
Eagle Downs, with a carrying value of $113.2 million; and
other smaller scale controlled project interests with an aggregate carrying value of $69.7 million. . Aquila capitalises exploration and evaluation expenditure only where a JORC compliant
Resource has been delineated; and For personal use only use personal For . intangible assets relate primarily to the company’s entitlement to an allocation of water for one of its coal projects in Queensland.
5 NTA is net tangible assets, which is calculated as net assets less intangible assets.
10
Aquila retains a contingent asset in respect of an insurance claim related to a flood event at the Isaac Plains operation in December 2010. The company’s share of the claim after deductibles has previously been disclosed as $94.5 million although there is a wide range of potential outcomes. The company is currently in discussions with the insurer to resolve this claim and the timing of and proceeds from the resolution of the claim remain uncertain.
Aquila announced on 14 April 2014 that it had settled its legal dispute with Vale in relation to Eagle Downs. The settlement provides that each party will pay for its own legal costs and that no remedial action or payment from either party is required.
3.4 Cash Flow
Aquila’s cash flow for the three years ended 30 June 2013 and for six months ended 31 December 2013 is summarised below:
Aquila - Cash Flow ($ millions) Year ended 30 June Six months to 2011 2012 2013 31 December actual actual actual 2013 Receipts in course of operations 135.8 192.5 12.3 0.2 Payments in course of operations (126.6) (167.7) (30.3) (9.0) Payments for exploration and evaluation (13.8) (13.2) (25.1) (4.3) expenditure Taxes paid - - - (66.1) Cash flows from operations (4.6) 11.6 (43.0) (79.2) Payments for exploration and evaluation (99.6) (108.1) (34.2) (4.3) expenditure Payments for property, plant and (18.6) (33.1) (17.7) (11.9) equipment (net) Proceeds from sale of projects - 0.5 599.9 0.4 Proceeds from sale / (payments for (4.0) (12.4) 17.4 - acquisition) of investments Security deposits 10.9 (0.1) 1.0 (0.2) Payments for intangible assets (4.3) (0.8) (0.7) - Cash flows from investing (115.7) (154.0) 564.8 (16.0) Net interest received 15.8 6.1 19.7 10.4 Net proceeds from share issues 22.4 - - (0.8) Drawdown / (repayment) of borrowings (14.2) - (0.0) (0.0) (net) Net cash generated (used) (96.2) (136.3) 541.4 (85.7) Cash – opening 281.2 184.5 50.3 591.4 Effects of exchange rate movements (0.4) 2.1 (0.4) (0.2) Cash – closing 184.5 50.3 591.4 505.4 Source: Aquila and Grant Samuel analysis
Aquila’s cash flows over the past three years reflect its transition from a producer to a
development company following the sale of its interest in the Isaac Plains operation in July 2012. For personal use only use personal For
Aquila is focussed on developing the Eagle Downs and West Pilbara projects and the cash outflows relating to exploration and evaluation and mine development activities in recent years have principally related to these projects.
During the 2013 financial year, Aquila received approximately $600 million from the sale of its interests in the Isaac Plains operation and the Belvedere coal project and a further $17.4 million
11
from the sale of its holding of preference shares in WICET Holdings Pty. The sale resulted in a significant tax liability, which was paid during the first half of the 2014 financial year.
3.5 Taxation Position
Under the Australian tax consolidation regime, Aquila and its wholly owned Australian resident entities have elected to be taxed as a single entity.
At 31 December 2013, Aquila had minimal carried forward income tax losses and no carried forward Australian capital losses.
Aquila had deferred tax assets of $169.6 million as at 30 June 2013 relating to deductible temporary differences arising from the Mineral Resource Rent Tax (“MRRT”). However this has not been recognised on the balance sheet as at this time it is not considered probable that the company will incur liabilities under the MRRT regime.
At 31 December 2013, Aquila had $107.6 million of accumulated franking credits.
3.6 Capital Structure and Ownership
3.6.1 Capital Structure
As at 30 April 2014, Aquila had the following securities on issue:
. 411,804,442 ordinary shares; . 1,870,000 options over 2,156,550 unissued ordinary shares; . 363,987 performance share rights over unissued ordinary shares; and . 1,219,147 share appreciation rights over unissued ordinary shares.
There are two tranches of options on issue. Tranche 1 options if exercised entitle the holder to 1.21 ordinary shares per option and Tranche 2 options 1.10 ordinary shares per option. Employee options lapse on the earlier of termination of employment or the expiry date, while director options lapse on the expiry date.
Aquila – Options on Issue as at 30 April 2014 Issued Exercise Share per Exercisable Grant Date Options Expiry Date Price Option Options 2 Jul 2010 905,000 1 Jul 2014 $11.40 1.21 543,000 8 Aug 2011-1 Dec 2011 965,000 7 Aug 2015 $8.71 1.1 337,750 Total 1,870,000 880,750 Source: Aquila
Those options that are yet to vest become exercisable between July 2014 and August 2015 unless the board concludes that a change of control of Aquila is about to or has occurred and exercises its discretion to enable early vesting.
For personal use only use personal For Aquila grants Performance Rights and Share Appreciation Rights under its long term incentive plan (“LTI”) to selected management employees.
12
Aquila – Rights on Issue as at 30 April 2014 Number Grant Date Performance Period Vesting conditions of rights Performance 19 February 2013 55,755 25 September 2013 to Rights 16 September 2015 19 February 2013 55,755 25 September 2013 to 16 September 2016 Within three months of the end of the 25 September 2013 84,159 25 September 2013 to relevant Performance 16 September 2014 Period in respect of 25 September 2013 84,159 25 September 2013 to that Tranche 16 September 2015 25 September 2013 84,159 25 September 2013 to 16 September 2016 Share 18 February 2013 189,826 25 September 2013 to Appreciation 16 September 2015 Rights 18 February 2013 150,492 25 September 2013 to 16 September 2016 Within three months of the end of the 25 September 2013 292,943 25 September 2013 to relevant Performance 16 September 2014 Period in respect of 25 September 2013 292,943 25 September 2013 to that Tranche 16 September 2015 25 September 2013 292,943 25 September 2013 to 16 September 2016 Source: Aquila
Each Performance Right converts into an ordinary share upon vesting. Share Appreciation Rights convert into an aggregate amount equal to the difference between the market value of one ordinary share at the end of the performance period and its market value at the start of the performance period multiplied by the number of Share Appreciation Rights that vest on that vesting date. The amount is settled in ordinary shares.
Performance Rights or Share Appreciation Rights will not vest until an employee receives a vesting notice from the Board of Directors advising them in writing of the number of LTI awards that have vested. Vesting is subject to the holder remaining an employee of the company and the Performance Rights or Share Appreciation Rights will generally lapse and be forfeited upon the holder ceasing to be an employee of the company.
Both Performance Rights and Share Appreciation Rights vest if the board concludes that a change of control of Aquila is about to or has occurred.
3.6.2 Ownership
At 23 May 2014, there were approximately 3,050 registered shareholders in Aquila. The top ten shareholders accounted for approximately 83.4% of the ordinary shares on issue.
As at 12 June 2014, Aquila’s substantial shareholders were as follows:
Aquila – Substantial Shareholders as at 12 June 2014 Number of For personal use only use personal For Shareholder Percentage Shares Tony Poli 119,104,536 28.9% Baosteel Group 81,492,569 19.8% Mineral Resources Limited 52,640,248 12.8% Charles B Bass 44,015,447 10.7% Source: Aquila
13
In November 2009, Baosteel Group Corporation invested in Aquila through a private placement pursuant to which it acquired a 15% interest in the company for $285.6 million. It was reported at the time of the placement that Baosteel Group Corporation would provide strategic co-operation to fast track Aquila’s key steel raw materials projects including iron ore, coal and manganese. Baosteel Group Corporation has since increased its relevant interest in the company to 19.8%.
On 5 May 2014 , Aurizon Holdings Limited (“Aurizon Holdings”) declared a relevant interest in Baosteel’s 19.8% shareholding in Aquila which arose as a result of its Joint Bidding Agreement with Baosteel Resources.
On 12 June 2014, Mineral Resources Limited (“MRL”) announced that it had acquired a relevant interest in 52,640,248 shares in Aquila which corresponds to 12.8% of the shares on issue. MRL acquired 50,219,618 shares from M&G Investment Management Limited at $3.75 per share and another block of 1,177,002 shares at $3.72 per share on 11 June 2014. The remaining 1,243,628 shares were acquired from 13 May 2014 to 10 June 2014 at prices ranging from $3.42 to $3.48. The weighted average consideration paid by MRL was $3.74 per share.
The top four beneficial shareholders together control approximately 72% of the shares in the company, which results in a relatively low free float for a company the size of Aquila.
3.7 Share Price Performance
3.7.1 Share Price History
A summary of the price and trading history of Aquila since 1 January 2010 is set out below:
Aquila - Share Price History Average Share Price ($) Weekly Average
Volume Weekly High Low Close (000’s) Transactions Year ended 31 December 2010 9.41 5.88 8.95 3,624 8,821 2011 9.24 3.93 5.85 2,223 9,748 2012 6.46 1.86 2.56 2,888 7,068 2013 3.27 1.63 2.30 3,067 5,942 Month ended 31 January 2014 2.48 2.14 2.43 2,376 4,875 28 February 2014 2.85 2.36 2.65 2,262 7,017 31 March 2014 2.74 2.26 2.34 2,173 6,324 30 April 2014 2.90 2.29 2.50 2,291 6,508 31 May 2014 3.55 2.34 3.47 5,786 6,255 Week ended 6 June 2014 3.55 3.45 3.45 1,797 4,661 13 June 2014 3.77 2.96 3.10 58,530 7,432
For personal use only use personal For Source: IRESS
The following graph illustrates the movement in the Aquila share price and trading volumes since 1 January 2010:
14
Aquila - Share Price and Trading Volume (Jan 2010 - Jun 2014)
$10.00 5,000
$8.00 4,000 Daily Daily Volume(000's)
$6.00 3,000 Price
$4.00 2,000
$2.00 1,000
$0.00 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
Source: IRESS
Aquila’s share price has fallen considerably over the past four years, from a high of $9.41 at the beginning of January 2010 to $2.45 the day before the announcement of the Offer on 5 May 2014.
During calendar year 2010, Aquila’s share price fell from a high of $9.41 at the beginning of the year to a low of $5.88 on 20 July 2010, significantly underperforming the broader resources index. The underperformance accelerated following the announcement of the results of the feasibility study for West Pilbara, including capital expenditure estimates that were considerably higher than previous guidance. The share price recovered during the second half of the year, closing the year at $8.95. The share price strengthening reflected a combination of strong operating performance at Aquila’s Isaac Plains operation, the reporting of increased resources and maiden reserves at West Pilbara and progress at Aquila’s other development projects.
Aquila’s share price traded in a relatively narrow range during the first few months of calendar year 2011, reaching a high of $9.24 on 27 April. The share price fell, initially modestly, following a weak production report on 29 April, with production at Isaac Plains affected by adverse weather conditions. The share price decline accelerated during the year following a series of announcements regarding an ongoing dispute with Vale, Aquila’s joint venture partner at the Isaac Plains operation and the Eagle Downs project. The market’s concern regarding development and operating costs at West Pilbara and the likelihood of a capital raising overshadowed positive progress made at Aquila’s operations. The share price fell rapidly to a low of $3.93 on 4 October 2011 before recovering somewhat to close the calendar year at $5.85.
During calendar year 2012, Aquila’s share price continued to fall along with the prices of its key commodities, exacerbated by uncertainty regarding the development of West Pilbara, notwithstanding Aquila’s announcement on 3 April 2012 of the sale of its interest
For personal use only use personal For in Isaac Plains operation for $430 million. The share price reached a low of $1.86 on 27 July before recovering modestly to close the year at $2.56
Between 1 January 2013 and the receipt of the Offer, Aquila’s share price ranged between a high of $3.27 on 24 January 2013 and a low of $1.63 on 5 April 2013. The share price fluctuations were broadly consistent with the performance of the Australian resources index.
15
3.7.2 Liquidity
Aquila has a tightly held share register with a free float of less than 25%. Approximately 32% of the share register was traded over the twelve months leading to the announcement of the Offer. Approximately 37.8 million shares were traded between 1 January 2014 and 4 May 2014 (the day before the announcement of the offer), which corresponds to around 27% of the share register on an annualised basis.
3.7.3 Relative Performance
Aquila is a member of various indices including the S&P/ASX 200 Index and the S&P/ASX 200 Resources index. At 17 June 2014, its weighting in these indices was 0.09% and 0.45% respectively. The following graph illustrates the performance of Aquila shares since 1 January 2010 relative to the S&P/ASX 200 Resources Index:
Aquila vs S&P/ASX 200 Resources Index (Jan 2010 - Jun 2014) 140
120
100
80 1 January 2010 1 January - 60
40
Index Base 100Base Index 20
0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14
Aquila S&P/ASX 200 Resources Index
Source: IRESS
Aquila has underperformed the S&P/ASX 200 Resources Index by a considerable margin since January 2010, in large part as a result of increasing market concerns regarding the development prospects for West Pilbara.
For personal use only use personal For
16
4 Profile of Aquila’s Assets
4.1 Eagle Downs
Description The Eagle Downs Hard Coking Coal (“HCC”) Project is located in the Bowen Basin in central Queensland, approximately 25 kilometres south of Moranbah and adjacent to the BHP Billiton Mitsubishi Alliance (“BMA”) Peak Downs mine:
Source: Aquila
Eagle Downs is owned by the BCCJV, which is 50% owned by Aquila Coal Pty Ltd (“Aquila Coal”), a wholly owned subsidiary of Aquila and 50% by Bowen Central Coal Pty Ltd (“Bowen Central Coal”), an indirect wholly owned subsidiary of Vale S.A. The manager of BCCJV, Eagle For personal use only use personal For Downs Coal Management Pty Ltd (“EDCM”) is also 50% owned by Aquila Coal and 50% by Bowen Central Coal.
17
Resources and Reserves Eagle Downs’ JORC compliant Resources as at January 2011 and Reserves as at March 2011 are set out below:
Eagle Downs - Resources as at January 2011 and Reserves as at March 2011 (100%) Harrow Harrow million tonnes Q Creek Upper Creek Lower Dysart Total Resources Measured 73 123 281 171 648 Indicated 20 36 73 43 171 Inferred 15 31 57 38 140 Total Resources 108 189 411 251 959
Reserves Proved - 60 91 55 207 Probable - 14 22 12 47 Total Reserves - 74 113 67 254 Source: Aquila
The Harrow Creek Lower and Dysart seam resources include pulverised coal injection (“PCI”) coal resources of 11 million tonnes and 58 million tonnes respectively.
Geology and Mineralisation Eagle Downs is located in the northern part of the Bowen Basin, on the western crop line of the Basin. The economic seams are contained in the late Permian Moranbah coal measures which are approximately 300 metres thick. The target seams in the Moranbah measures lie between 270 metres and 700 metres and range in thickness from 3.2 metres to 9 metres:
Eagle Downs - Coal Seams6 Harrow Creek Upper Harrow Creek Lower Dysart Seam thickness 3.5-5.2 metres 7.2- > 8.0 metres7 4.8-5.4 metres Depth of cover 270-600 metres 350-600 metres 450-700 metres longwall top coal caving longwall top coal caving Preferred mining method 300 metre width longwall (“LTCC”) on 300 metre (“LTCC”) on 300m wide wide face face Source: Aquila
Eagle Downs coal product has been assessed as low volatile, standard-grade hard coking coal.
Project Development and Logistics The decision to develop the Eagle Downs underground multi-seam longwall hard coking coal mine was made by the BCCJV in January 2012 and it is currently under construction. Progress to date has included completion of the box cut excavation, portal arches, mine portal area, site roads and raw water dam. A $142.8 million drifts contract was executed in December 2013 (covering two drifts extending approximately two kilometres each to a vertical depth of 270 metres) and mobilisation of facilities and equipment to site commenced in March 2014 to undertake excavation For personal use only use personal For of the drifts. Other contracts expected to be awarded in 2014/2015 include contracts for
6 The Eagle Downs Coal seams exclude the Q seam which overlays the Harrow Creek Upper seam but has not been considered as a mining target under the current mine plan. 7 In the southern portion of the resource area, the Harrow Creek Upper seam coalesces with the Harrow Creek Lower seam to form a combined seam with thickness in excess of 14 metres.
18
ventilation shafts and fans, development equipment, longwall equipment, conveyors, the coal handling and preparation plant (“CHPP”) and bulk site earthworks.
The project has a total funding requirement of $1.6 billion8 to the first 100,000 tonnes of longwall production (including a $240 million contingency), of which $117 million had been invested (on a 100% basis) as at 31 March 2014. BCCJV expects to capitalise on the currently subdued market for mining construction services by progressing tenders and negotiations on more favourable terms, which may result in a reduction in the total funding requirement. Aquila’s share of the funding requirement is approximately $821 million, of which $59 million had been invested as at 31 March 2014.
First longwall coal production from Eagle Downs is expected in the first half of calendar year 2017. The mine plan involves: . single longwall and systematic recovery of coal from the Harrow Creek Upper, Harrow Creek Lower and Dysart seams; . peak production rate of 5.6 Mtpa (and average production over the first full 10 years of production of 4.5 Mtpa); . a 48 year mine life; and . average cash operating costs of approximately $90 per product tonne FOB (excluding royalties)9.
The Eagle Downs mine is close to existing heavy haul rail lines connecting it to a number of coal terminals: . in the short term, it is proposed that Aquila’s share of Eagle Downs coal will be transported to the Port of Gladstone via the Blackwater rail system and exported through the Wiggins Island Coal Export Terminal (“WICET”). Aquila has 1.6Mtpa of port capacity under a Take or Pay contract in Stage 1 of WICET which commences in January 2015 and has reached agreement with WICET for Eagle Downs to be added as a source mine for Aquila’s share of coal from the project. Aquila is investigating options for securing additional port and rail capacity. The ramp up of coal supply to WICET will result in spare terminal capacity until at least 2018 and there is currently WICET capacity for sale on the secondary market; and . Aquila is investigating the longer term acquisition from the secondary market of port capacity at Dalrymple Bay Coal Terminal (“DBCT”) with matched rail capacity. Contracts for port capacity at DBCT are evergreen and entered into on a 10 year rolling basis. A number of these contracts are due for renewal over the next two years, which may provide an opportunity to secure permanent capacity at DBCT. This logistics solution provides a better outcome for Aquila than continued use of WICET due to the shorter haulage distance and lower port charges.
Aquila has no existing off-take commitments in respect of Eagle Downs.
For personal use only use personal For
8 Expressed in real 2014 $ terms. 9 The cash operating cost of $90 per product tonne FOB (excluding royalties) is expressed in real 2014 $ terms and is based on Aquila’s share of coal produced from Eagle Downs being transported to and shipped from WICET (to utilise the existing Take or Pay obligation in place) but subsequently moving to DBCT.
19
Expansion and Exploration
. Two Longwall Expansion The June 2009 Feasibility Study for Eagle Downs investigated the potential to operate two longwalls simultaneously. However, the two longwall expansion was not considered in the Definitive Feasibility Study (“DFS”) given the imperative to establish the mine. The ground at Eagle Downs is considered geotechnically suitable for the simultaneous operation of two longwalls (demonstrated by the interburden thickness and the strength of strata).
The two longwall expansion has not been approved by the BCCJV. However, management of Aquila has used the costs and volumes in the June 2009 Feasibility Study as the basis for producing a high level conceptual mining plan which assumes that the mining of the Harrow Creek Upper and Dysart seams using longwalls occurs sequentially and the mining of the Harrow Creek Lower seam takes place concurrently from the year ending 30 June 2019. This mine plan results in: a peak production rate of 8.5 Mtpa (with average production over first full 10 years of production of 6.6 Mtpa); a 29 year mine life; an additional $337 million10 of capital expenditure; and lower cash operating costs than under the single longwall operation.
The higher rate of production, compressed mine life and lower capital intensity of the two longwall expansion would provide significant cost savings and synergies to the project.
. Eagle Downs South Project
The Eagle Downs South Project is owned by the BCCJV and comprises the Eagle Downs South Mineral Development Licence. Previous exploration has confirmed the continuation of the Eagle Downs coal seams and increasing coal rank with depth.
There is the potential for the Eagle Downs South Project to be developed into an underground longwall mine similar to Eagle Downs. This would realise considerable synergies between the two projects, in particular from sharing of infrastructure.
Further exploration is required to define the limits of the resource, seam structure, extent of intrusion and coal quality characteristics. A drilling program is underway and it is proposed to commence a Concept Study once the borehole analysis is complete.
An application for a Mineral Development Licence (“MDL”) covering Eagle Downs South and Eagle Downs South Extended was lodged in November 2013 and the MDL is expected to be granted in the September quarter of 2014, subject to finalisation of documentation.
4.2 Washpool
The Washpool Hard Coking Coal Project (“Washpool”) (Aquila 100%) is located in the Bowen Basin in central Queensland, approximately 24 kilometres north-west of Blackwater, between Wesfarmer’s Curragh Mine and Idemitsu’s Ensham Mine. The location of Washpool is shown on
For personal use only use personal For the map below:
10 Expressed in real 2014 $ terms.
20
Source: Aquila
Washpool comprises EPC 958 (Washpool), EPC 966 (Mt Crocker) and MDL 403. As a result of further studies, Mining Lease Application (“MLa”) 80164 was made in December 2009, which defines the project area and MLa 80176 (Washpool B) and MLa 80177 (Washpool C) have since been lodged for transport routes and associated infrastructure.
Washpool’s total Resources as at July 2011 and Reserves as at May 2010 are set out below:
For personal use only use personal For
21
Washpool - Resources as at July 2011 and Reserves as at May 2010 (million tonnes) (100%) Resources Measured 124.9 Indicated 9.7 Inferred 62.1 Total Resources 196.7 Reserves Proved 94.7 Probable 13.5 Total Reserves 108.3 Source: Aquila
Washpool coal product has been assessed as having many of the characteristics of a premium grade coking coal although with higher than benchmark specification ash content (of around 15%). As a result, its best use is for blending with a range of lower quality coking coals.
A DFS was completed in 2011 and confirmed the technical and economic feasibility of an open cut mine producing up to 2.6 Mtpa over a 16 year mine life, capital expenditure of $368 million (including a $33 million contingency) and cash operating costs of approximately $125 per tonne FOB (excluding royalties), over the first 10 years. Washpool has secured 1.6Mtpa of port capacity at Stage 1 of WICET.
A Supplementary Study was completed in April 2014 which builds upon the findings of the 2011 DFS. The key outcomes of the Supplementary Study were:
. an 11.2% increase in yield (from 36.5% to 40.6%) through finer grinding of Washpool coal, which may increase full production to 2.9Mtpa;
. demonstration through large scale physical blending trials that Washpool coal significantly increases coking properties of complementary semi-hard coking coals;
. expected up front capital costs of approximately $358 million (including contingency). Compared to the capital cost estimate in the DFS, the cost of additional processing infrastructure has more than offset the savings in surface infrastructure; and
. expected cash operating costs of $122/t FOB (excluding royalties), over a 15 year mine life.
Regulatory approvals for Washpool are well advanced. The advertising period for the Mining Leases is expected to conclude in the second half of 2014 and subject to all land compensation agreements being executed, the Mining Leases should be granted following this period.
4.3 West Pilbara
Overview West Pilbara is a 2.2 billion tonne iron ore project centred around the mining of a suite of hematite deposits located south and east of Pannawonica in the West Pilbara region of Western Australia and covering an area of over 9,000 km2 over 88 tenements. Work completed to date has
For personal use only use personal For contemplated annual production of 30 to 45 million tonnes of iron ore per annum, sourced from a number of deposits, crushing, screening and blending at one or more central processing facilities (“CPF”), transport to the coast via a heavy haul railway to be constructed and export via a deep- water port to be developed at Anketell Point. The following map shows the location of the deposits, railway line and port:
22
Source: Aquila
Ownership West Pilbara is owned by the Australian Premium Iron joint venture (“API JV”), an unincorporated 50:50 joint venture between Aquila and AMCI (IO) Pty Ltd, which in turn is owned 51% by AMCI and 49% by POSCO. The ownership structure of the various components of the project can be summarised as follows:
For personal use only use personal For
23
AMCI POSCO
51% 49%
Aquila AMCI (IO)
50% 50%
API JV
100% 80% 70% 100% 100% 100% 100% 100%
Red Hill JV Mt Stuart JV Yalleen JV Mine Cardo Bore East Catho Well Ken’s Bore East Kumina Creek Buckland Hills Hardey Innawalley Pool infrastructure Cardo Bore North Robe Exit Farquhar East (Eastern Pilbara) CPF Catho Well North Farquhar West Rail Cochrane Headon Port Jewel Kumina Creek East Ken’s Bore Weckl Trinity Bore Upper Cane “Hardey “Stage 1” “Mt Elvire Project” Project”
Source: Aquila
API JV is managed by API Management Pty Ltd, an entity jointly owned by Aquila and AMCI (IO).
The Red Hill joint venture (“Red Hill JV”) is jointly owned by the API JV (60% increasing to 80%) and the ASX-listed junior iron ore explorer Red Hill Iron Limited (“Red Hill Iron”) (40% reducing to 20%). API JV will increase its stake in Red Hill JV to 80% at first production by funding Red Hill Iron’s share of pre-production costs. Red Hill Iron will repay the API JV (with interest) from its share of cash flows from the Red Hill JV.
The Mt Stuart joint venture (“Mt Stuart JV”) is owned by API JV (70%) and the ASX-listed junior iron ore explorer Cullen Resources Limited (“Cullen”) (30%). Cullen is required to contribute its share of pre-production capital or be diluted.
API JV holds other tenements, either directly or through wholly-owned entities. Studies completed to date assume that the API JV would be the owner and operator of the central mine infrastructure and processing facility, the railway and the port and would charge the Red Hill and Mt Stuart joint ventures and any other third party users for access to these facilities.
Mining and Processing Most of the deposits of the West Pilbara project are channel iron deposits formed through the drainage of the Hamersley ranges located to the southeast of the API JV tenements, and subsequent erosion. The shallow nature of the deposits results in a low strip ratio, which contributes favourably to the economics of the project. The deposits are amenable to conventional drill and blast mining methods. Ore will be transported by shuttle train and haul truck to a central processing facility for crushing, screening and blending when required. Although ores from the Stage 1 areas exhibit elevated levels of alumina, it is expected that this will be dealt with through For personal use only use personal For blending. Some of the ores sourced from deposits located in the Mt Elvire and Hardey project areas have elevated levels of phosphorus and may require beneficiation. API JV expects to be able to produce fines products with consistent iron grades and other characteristics that will be attractive to offtakers. The ore will be railed on a heavy haul railway to a deep-water port located at Anketell Point for export. The existing resource could support annual production of 45Mtpa for a project life of more than 30 years.
24
Development The development plan for the West Pilbara project is yet to be optimised.
A feasibility study released in July 2010 contemplated a 30Mtpa operation comprising:
. mining of eight deposits concentrated along a relatively narrow area stretching from 30km to 85km south west of Pannawonica in tenements held by the Red Hill JV, Mt Stuart JV and API JV;
. a 30Mtpa central processing facility and supporting infrastructure to be constructed next to the Cardo Bore north deposit;
. a new 282km railway linking the deposits to the coast at Anketell Point some 30km east of Karratha; and
. a multi-user deep water port and supporting facilities to be developed at Anketell Point. A 21km long deep-water channel, of which 17km will have to be dredged, would allow access to capesize vessels with capacities of up to 250,000dwt.
Pre-production capital cost estimates were revised in October 2012 and are now estimated at $7.4bn for the 30Mtpa scenario (including rail and port). Operating costs for Stage 1 were estimated at approximately $24 per dry metric tonne of ore (FOB, pre royalty) which would position the project in the first quartile of iron ore producers.
Subsequent studies suggest that a development based on higher production rates (potentially in the range 40-50Mtpa) would deliver significantly enhanced economics relative to the 30Mtpa feasibility study case, given the relatively modest incremental capital expenditures required. The increased production could be sourced from the current planned mines in the Stage 1 areas and deposits in the Hardey and Mt Elvire areas. Value would be maximised by deferring the introduction of production from Hardey and Mt Elvire for as long as possible, because this would defer the need to incur capital expenditure on additional rail infrastructure. Only limited analysis has been undertaken on the capacity of the Stage 1 areas to achieve production of 45Mtpa.
The estimated incremental capital expenditure required to achieve production of 45Mtpa (excluding any additional rail infrastructure required to link the Hardey or Mt Elvire deposits to the central operation) would be fairly limited, as shown below:
West Pilbara – Pre-Production Capital Costs (100%) $ billion (2012 real) 30 Mtpa 45 Mtpa Incremental Capex Mine 1.7 2.0 Increased capacity at central processing facility Rail 2.6 2.7 Additional rolling stock and sidings Port 3.1 3.3 Additional berth and infrastructure Total 7.4 8.0 Source: Aquila
The production of ore from the Hardey or Mt Elvire project areas would require additional capital expenditure, including the development of new mines and the construction of a 150km extension of the railway from Trinity Bore to Hardey and/or a rail link to the Mt Elvire mines.
For personal use only use personal For Given the relatively modest incremental capital required to achieve a substantial increase in production, and the consequently significantly improved investment economics of a larger project, it appears likely that any development of West Pilbara would be based on a larger capacity project (around 45 Mtpa).
Aquila believes that the recent slowdown in the construction sector and relative softness in the labour market in the Pilbara could result in capital costs lower than those currently estimated.
25
A capital optimisation study has demonstrated the potential to reduce capital expenditure by $2.4bn through the outsourcing of certain services (excluding Below Rail and Port Common User Infrastructure). This would result in an estimated $15.00 per dry metric tonne increase in operating costs. Aquila has also been in discussions with other parties (including Baosteel) about alternative ownership structures whereby the transport infrastructure (i.e. rail and port) would be developed, owned and operated by a third party on an open access basis and the joint venture would pay for access to the facilities. Although this would substantially reduce upfront capital requirements, it will have a corresponding impact on operating costs as the owner of the infrastructure will aim to generate a commercial rate of return through appropriate access fees.
Marketing Ores from the Stage 1 project areas can be blended to produce a consistent fines product grading 57.2% Fe and containing relatively elevated levels of alumina. The product, West Pilbara Fines (“WPF 1”), has been extensively tested and has in particular been benchmarked against three fine ores produced by local competitors (Rio Tinto’s Pilbara Blend and Robe River fines and BHP’s Yandi fines). It was found to have properties similar to those Robe River fines and can be added to mill feeds to make up to 20% of the total blend with minimal impact on sinter quality. API has signed Memoranda of Understanding with approximately 40 Chinese, Japanese, Taiwanese and Korean mills, showing the strong level of support for the product. Approximately 12% of the total Stage 1 production will be a slightly inferior product grading 53-55% iron (“WPF 2”). This product will be sold opportunistically. WPF1 and WPF2 are expected to be sold at a discount to relevant benchmark to reflect their elevated levels of impurities.
Approximately half of the resource not captured in the Stage 1 development would be expected to yield a product comparable to WPF1 but the balance is expected to require beneficiation to be attractive to offtakers.
Resources and Reserves A JORC mineral resource of 2.2 billion tonnes has been defined at the API JV tenements and can be summarised as follows:
West Pilbara - Resources as at April 2013 (100%)11 LOI12 Mt Fe% SiO % Al O % P% S% Mn% MgO% 2 2 3 % Stage 1 687 56.6 6.06 3.67 0.069 0.017 0.037 0.106 8.69 Measured 209 57.8 5.29 3.56 0.079 0.013 0.029 0.082 7.95 Indicated 392 56.2 6.30 3.69 0.065 0.018 0.038 0.113 8.94 Inferred 86 55.4 6.85 3.86 0.061 0.019 0.049 0.136 9.38 Later Stages 1,546 56.2 Measured 106 Indicated 71 Inferred 1,546 Total 2,233 56.3 Source: Aquila
More information regarding the resource in set out in AMC’s report in Appendix 5.
Reserve estimates, which have been prepared for the Stage 1 deposits only, are as follows: For personal use only use personal For
11 Includes 63Mt at 58.8% Fe relating to the Innawalley deposit in East Pilbara (Aquila 100%). 12 Loss on Ignition.
26
West Pilbara - Reserves as at April 2013 (100%)
Mt Fe% SiO2% Al2O3% P% LOI% Proved 166 58.0 5.11 3.38 0.08 7.99 Probable 279 56.5 6.13 3.48 0.06 8.90 Total 446 57.1 5.75 3.44 0.07 8.56 Source: Aquila
Grade optimisation work shows the potential to increase the reserve to 588Mt at a grade of 56.3% iron.
Expansion and Exploration There is exploration upside in various areas of the tenement holdings. Bringing new ore sources into production would require minimal incremental capital investment, with additional capital mainly focussed on expansion of the central processing facility, the acquisition of additional rolling stock, and additional berths and a ship loader at the port.
The rail and port infrastructure is expected to be developed and operated on an open access basis and would have the capacity to transport ore from other projects in the region that could not otherwise justify the development of transport infrastructure. Unlocking the value of these stranded deposits would boost the economics of West Pilbara. However, the quantum and timing of these potential benefits is uncertain.
Project Status The main approvals for the project have been received. In particular, the primary environmental approvals for the mines, rail and port have been granted. Granting of the remaining approvals (environmental approvals for mine accommodation and water licences, State agreement and legislation authorising the construction of a private railway and native title negotiations and land acquisitions) is not believed to be problematic. On the basis of an estimated three and a half year construction period, the project could notionally commence production in early 2019 (although reconfiguration to a larger project of 45Mtpa would require further work and would presumably delay the commencement of production). However, Aquila and AMCI (IO) have not reached agreement on certain issues that need to be resolved for the project to be progressed. The project continued on minimum expenditure in the 2014 financial year, as AMCI (IO) would not support the proposed budget recommended by the management company, which Aquila supported (subject to the addition and re-sequencing of certain works).
4.4 Avontuur
The Avontuur Project (Aquila 74%) is located approximately 525km south-west of Johannesburg in South Africa, and is adjacent to the Kalahari Manganese Field (“KMF”) in the Northern Cape Province. The other 26% of the Avontuur Project is held by Aquila’s Black Economic Empowerment (“BEE”) partner, Rakana Consolidated Mines (Proprietary) Limited. The Kalahari Manganese Field is thought to hold the largest economic manganese reserve base in the world and supplies some of the world biggest manganese operations, including Gloria, Mamatwan, Wessels and Nchwaning. The Avontuur tenement covers approximately 370 square kilometres in area and encompasses the Avontuur Basin.
The Gravenhage manganese deposit was discovered by Aquila in April 2008, and since this time
For personal use only use personal For Aquila has conducted an extensive exploration of the Avontuur tenement, focussed on the Gravenhage deposit. Gravenhage covers approximately 34 square kilometres. Aquila completed a DFS on Gravenhage in 2011 and is assessing options for increasing minable reserves and production rates.
The map below shows the location of the deposits with the Avontuur tenement, and project location relative to the port infrastructure in South Africa.
27
Source: Aquila
Although Aquila is in possession of a number of the regulatory approvals necessary to commence construction at Gravenhage, it has still not received a mining licence for the Gravenhage Project. A complication in Aquila’s mining right grant process is a claimed overlapping prospecting right in favour of Pan African Mineral Development Company (Pty) Ltd (“PAMDC”), an entity owned by the governments of South Africa, Zambia and Zimbabwe. The PAMDC prospecting right was allegedly granted over five years after the grant of Aquila’s prospecting right. Aquila has lodged an appeal with the South African Department of Mineral Resources to protect its position. The only environmental licence outstanding is a Water Use Licence.
For personal use only use personal For
28
Resources and Reserves Avontuur’s mineral resources as at August 2013 are summarised as follows:
Avontuur – Resources as at August 2013 (100%)13 Tonnage Mn
(Mt) (%) Gravenhage resources14 Measured 63.9 39.16 Indicated 28.4 38.23 Inferred 19.4 36.46 Total 111.7 38.45 Other Avontuur resources Inferred15 30.0 37.97 Total resources 141.7 38.36 Source: Aquila
An updated JORC compliant Mineral Resource Estimate was completed for Gravenhage during the third quarter of 2013. Mineral resources of 111.7Mt at 38.5% Mn represent an additional 12.8 million tonnes of measured and indicated ore at Gravenhage compared to Avontuur’s mineral resources at November 2011. The additional material is the result of drilling undertaken over the two years from 2011 to 2013. The reserves at Avontuur have not been restated since November 2011, and are summarised as follows:
13 Avontuur – Reserves as at November 2011 (100%) 16 Tonnage Mn
(Mt) (%) Proved 8.6 40.30 Probable 11.6 39.99 Total Reserves 20.2 40.12 Source: Aquila
Mining and Treatment A DFS for a medium-high grade manganese project located at Gravenhage was completed in November 2011, based on a Reserve of 20.2Mt (40.1% Mn). The DFS proposed a 1.5Mtpa mining operation, initially from an open pit and subsequently from an underground mine accessed by a decline from the open pit. The expected life of mine was 17 years, with oxide ore being crushed and screened to produce 1.125Mtpa of lump ore for export and 330ktpa of fines ore for sale to domestic sinter plants. Stockpiles at the mine will be blended to ensure consistent product for domestic and export markets. Ore produced is expected to be relatively low in contaminant levels that otherwise contribute to slag formation in ferro-alloy furnaces. A recently completed update to the mine plan in the DFS contemplates an expansion of the Gravenhage operations to 2.5Mtpa.
Product to be used domestically as sinter feed is expected to be transferred by road to sinter plants in the vicinity of Hotazel, approximately 60 kilometres away. Product for export is expected to be transported by rail for shipment from Port Elizabeth. There is currently rail access at Hotazel, approximately 60 kilometres from the site, and the South African Government’s infrastructure
For personal use only use personal For plan includes the expansion of existing rail facilities to Port Elizabeth and subsequently to Ngqura.
13 Significant figures do not imply precision. Figures are rounded according to JORC Code Guidelines. 14 Resources have been estimated using a cut-off grade of 34% Mn. 15 Comprising 19.8Mt at 36.1% Mn at Gravenhage South, 8.4Mt at 40.8% MN at Haakdorn and 1.8Mt at 45.5% Mn at Eersbegint. 16 Reserves have been estimated using a resource cut-off grade of 34% Mn.
29
However, transport arrangements for Avontuur remain uncertain, with definitive transport arrangements unlikely to be put in place for some time.
4.5 Exploration
4.5.1 Talwood
The Talwood Coal Project (“Talwood”) is 100% owned by Aquila. It is located in the Bowen Basin in central Queensland, approximately 35 kilometres north of Moranbah and 130 kilometres south west of Mackay. The tenement is adjacent to, immediately east of and down-dip from the BMA Goonyella Riverside.
Aquila was offered the grant of a Mineral Development Licence application covering the eastern 11 sub-block area following the lodgement of an application by the company. Aquila accepted in March 2014 and expects to be formally granted the licence in the September 2014 quarter.
Talwood resources as at May 2013 are set out below:
Talwood - Resources as at May 2013 (100%) Rangal Coal Measures Moranbah Coal Measures Leichhardt Vermont Goonyella Goonyella Total million tonnes Seam Seam Upper Middle Measured 46.6 31.3 - - 77.9 Indicated 31.8 44.8 12.5 18.5 107.6 Inferred 6.8 26.9 92.5 123.1 249.3 Total 85.2 103.0 105.0 141.6 434.9 Source: Aquila
The area has been subject to several separate exploration programs, the latest undertaken in 2012. A Concept Study was completed in 2011. The majority of the resources are best suited to a shallow box-cut development for underground longwall mining operations.
4.5.2 Walton
The Walton PCI Project (“Walton”) (Aquila 100%) is located in the Bowen Basin in central Queensland, approximately 175 kilometres west of Rockhampton and close to Carabella’s Bluff Project and Bandanna’s Dingo West Project.
Walton resources as at May 2013 are set out below:
Walton - Resources as at May 2013 (100%) Rangal Coal Burngrove Coal Total million tonnes Measures Measures Measured 14.4 - 14.1 Indicated 3.1 - 3.1 Inferred 10.0 19.1 29.1
Total 27.5 19.1 46.6 For personal use only use personal For Source: Aquila
The project has identified resources in the Rangal and Burngrove Coal Measures. The area has been subject to four separate exploration programs, the latest undertaken in 2014. Coal quality testing has indicated that a number of the seams could be washed to produce a low volatile, high yielding PCI product. The deposit would be developed as an open cut mine and is expected to be low cost with upfront development capital expected to be less than $100 million targeting the resource in the Rangal coal measures only.
30
The Capricorn Highway and Blackwater Railway System traverse the tenement. The Blackwater Railway System carries coal to the Port of Gladstone.
For personal use only use personal For
31
4.5.3 Other Coal Exploration Assets
Aquila owns a number of coal exploration tenements in the Bowen Basin and the Surat Basin in Queensland. The location of these tenements is illustrated on the map in Section 4.2. Aquila’s other exploration assets can be divided into early stage tenements and resource tenements (on which Aquila is incurring expenditure). These exploration tenements are summarised below:
Aquila Coal Interests – Other Exploration Assets Tenement17 EPC# Location Size (km2) Target Coal Product Adler Downs EPC 1153 Central Bowen Basin 241.68 Coking, PCI, and Export Thermal Bendoba EPC 1190 Surat Basin 550.14 Export Thermal Blenheim EPC 1211 Northern Bowen Basin 143.1 Coking, PCI, Export Thermal Blenheim Extended EPC 1219 Northern Bowen Basin 41.34 Coking, PCI, Export Thermal Bowen River EPC 968 Northern Bowen Basin 190.8 Coking, PCI, Export Thermal Box Creek EPC 1191 Surat Basin 381.6 Export thermal Cabbage Tree EPC 1412 Southern Bowen Basin 429.3 Export Thermal Cabbage Tree West EPC 2467 Southern Bowen Basin 604.2 Export Thermal Cornwall EPC 1192 Surat Basin 585.12 Export thermal Dawson Vale EPC 995 Southern Bowen Basin 190.8 Export Thermal Duaringa EPC 960 Central Bowen Basin 209.88 PCI, Export Thermal Exevale EPC 752 Northern Bowen Basin 98.58 Coking, PCI, Export Thermal Forest Vale EPC 1203 Surat Basin 845.88 Export Thermal Isaac River EPC 830 Central Bowen Basin 34.98 Coking, Export Thermal Mt Crocker EPC 966 Central Bowen Basin 740.94 Coking, PCI, Export Thermal Mt Gotthardt EPC 883 Northern Bowen Basin 38.16 Coking, PCI, Export Thermal Peak Downs East 18 EPC 795 Central Bowen Basin 54.06 Coking, PCI Peak Downs Extended 19 EPC 1077 Central Bowen Basin 9.54 Coking, PCI Speculation Creek EPC 1032 Central Bowen Basin 15.9 Coking, Export Thermal Springvale EPC 965 Southern Bowen Basin 82.68 Export Thermal Stragglers EPC 1214 Northern Bowen Basin 15.9 Coking, PCI, Export Thermal Talwood 19 EPC 985 Northern Bowen Basin 54.06 Coking, Export Thermal Washpool EPC 958 Central Bowen Basin 318 Coking, Export Thermal Wilpeena EPC 959 Central Bowen Basin 41.34 PCI Tenement MDL# Location Size (km2) Target Coal Product Isaac River MDL 444 Surat Basin 4.33 Coking, Export Thermal Exevale MDL 442 Northern Bowen Basin 102.24 Coking, PCI, Export Thermal Cornwall MDLa 49720 Surat Basin 403.91 Export Thermal Source: Aquila
17 EPC 954 (Mt Gotthardt South, EPC 1013 (Walton) and EPC 2302 (Walton North) are in the process of being fully surrendered as they overlapped with the granted MDL 442 (Exevale) and MDL 505 (Walton) respectively. Financial Assurance return and Environmental Authority surrender reporting still to occur. 18 EPC 795 and EPC 1077 are the two pre-requisite tenements for the MDLa 519 (Eagle Downs South), which is owned For personal use only use personal For by the BCCJV (50% Aquila). A letter of offer of grant has been received and for MDLa 519. Subject to grant, the majority of EPC 795 and EPC 1077 will be surrendered leaving approximately 3 sub blocks which may be surrendered. 19 EPC 985 is the pre-requisite tenement for the MDLa 518 (Talwood). A letter of offer of grant has been received for MDLa518 in February 2014, and was accepted with all fees and financial assurances paid by Talwood Coal Pty Ltd in March 2014. Subject to grant, the majority of EPC 985 will be surrendered leaving approximately 6 sub blocks. 20 MDLa497 has been given an offer to grant in February 2014, and was accepted with all fees and financial assurances paid by Argos (QLD) Pty Ltd in March 2014.
32
Further details on Aquila’s coal exploration assets are set out in the AMC Report included as Appendix 5 to this report.
4.5.4 Thabazimbi
Aquila holds a 74% economic interest in the Thabazimbi Iron Ore Project. The Black Economic Empowerment company Rakana Consolidated Mines Pty Limited (“Rakana”), with which Aquila formed an iron ore prospecting joint venture in April 2006, holds the balance. The project is located in the Limpopo Province of South Africa, approximately 230km north of Johannesburg, near the town of Thabazimbi which lies in a mountainous area approximately 950m above sea level.
Source: Aquila
The project holds five prospecting rights covering a total area of over 70,000 hectares. The joint venture started prospecting in the region in late 2007 and discovered the Meletse Iron Ore Deposit ("Meletse Deposit") on the Klipgat and Donkerpoort Prospecting Rights. The Meletse deposit has a JORC compliant resource of 80.8Mt at a grade of 61.1% iron with low levels of contaminants:
Thabazimbi - Resources as at November 2012 (100%) 21 Mt Fe% SiO2% Al2O3% P% LOI % Measured 37.1 62.28 7.57 0.68 0.045 1.26
For personal use only use personal For Indicated 23.5 60.85 9.35 0.75 0.052 1.59 Inferred 20.2 59.20 11.15 0.83 0.059 1.79 Total 80.8 61.09 8.99 0.73 0.051 1.48 Source: Aquila
21 LOI stands for Loss on Ignition.
33
A scoping study for Meletse was completed in May 2011 and updated in June 2013. The June 2013 study contemplated production rates of up to 4Mtpa from an open pit operation, yielding a high quality product containing high grade lump ore (at least 65% Fe) over a mine life of more than 15 years, with only a small percentage of the ore requiring beneficiation. Water and power are potentially available locally. In addition to exploring options for domestic product sales, several rail and port transport options are being considered to export the product.
Aquila is in discussions with the national rail operator Transnet and with port operators to better define transport options for exports. The company is progressing approvals with the government. A mining right application over the Meletse deposit has been submitted in July 2013 to the South African Department of Mineral Resources and environmental approvals are being progressed. Aquila is also undertaking exploration activities to better define known deposits to delineate additional resources and to test a number of targets with a view to identifying potential satellite deposits or new clusters of deposits capable of underpinning a standalone project. A number of critical tasks (e.g. feasibility studies) and approvals (e.g. water use licence) are outstanding.
4.5.5 Northern Cape Iron Ore Project
Aquila holds a 74% economic interest in two prospecting rights in the Northern Cape region of South Africa where it is prospecting for iron ore. The company is currently conducting RC drilling to test the Waterkloof prospect.
For personal use only use personal For
34
5 Valuation of Aquila
5.1 Summary
Grant Samuel has valued Aquila in the range $1,608-2,157 million which corresponds to a value of $3.90-5.24 per share. The valuation represents the estimated full underlying value of Aquila assuming 100% of the company was available to be acquired and includes a premium for control. The value exceeds the price at which, based on current market conditions, Grant Samuel would expect Aquila shares to trade on the ASX in the absence of a takeover offer.
The value for Aquila is the aggregate of the estimated market value of Aquila’s resources interests and other assets, adjusted for Aquila’s net cash at 31 December 2013. The valuation is summarised below:
Aquila - Valuation Summary ($ millions) Report Value Range Section Reference Low High Eagle Downs 5.5.1 400 500 West Pilbara 5.5.2 500 700 Washpool 5.5.3 25 50 Avontuur 5.5.4 125 175 Thabazimbi 5.5.5 50 100 Other resources and exploration assets 5.5.5 49 132 Other assets and liabilities 5.6 14 44 Head office costs (net of savings) 5.7 (45) (35) Enterprise value 1,118 1,666 Net cash at 31 December 2013 5.8 494 494 Value attributable to holders of options and rights 5.9 (4) (3) Value of equity 1,608 2,157 Shares on issue (millions) 411.8 411.8 Value per ordinary share 3.90 5.24
The principal approach to valuing Aquila’s resources assets was by discounted cash flow (“DCF”) analysis, supported where possible by benchmark analysis based on comparable transactions.
Grant Samuel appointed AMC Consultants Pty Ltd (“AMC”) as independent technical specialist to review Aquila’s assets. In relation to Aquila’s development assets (Eagle Downs, West Pilbara, Avontuur and Washpool), AMC’s role included a review of reserves and resources, development plans, production schedules, operating costs, capital costs and exploration potential. AMC also prepared valuations of Aquila’s other resources and exploration interests.
Valuation scenarios were developed by Grant Samuel, in conjunction with AMC, for Aquila’s Eagle Downs, Washpool, West Pilbara and Avontuur projects, based on assumptions regarding production rates, operating costs and capital costs developed by AMC.
The DCF modelling uses as its starting point the balance sheet of Aquila as at 31 December 2013 and projects A$ denominated cash flows from 1 January 2014 to the end of the mine life of each For personal use only use personal For modelled asset. Projected ungeared after tax cash flows were discounted to a present value using nominal after tax discount rates of 9.5%-10.5% for Aquila’s assets. Appendix 2 sets out a detailed analysis of the selection of these discount rates.
Construction has commenced on Aquila’s Eagle Downs coking coal project. All Aquila’s other assets are pre-development projects or exploration interests. Such assets are by their nature difficult to value. In particular:
35
. the West Pilbara iron ore project is a substantial iron ore project with reserves of 446 million tonnes and resources of 2.2 billion tonnes. Up-front capital costs are estimated at $7.5- 8.0 billion. While a feasibility study for a 30Mtpa operation was completed in 2010, more recent work suggests that a development based on higher production rates (of the order of 45Mtpa) would exhibit significantly improved economics. The feasibility and other development studies undertaken contemplated only a relatively short project life, with production for around 15 years. In reality, however, given the extent of the resource base, the very long life of the rail and port infrastructure and the presence of other third party iron ore resources in the area, the project is likely to run for many years beyond an initial 15 year mine life. The optionality inherent in a very long life project is difficult to value with any precision; . development progress on West Pilbara has stalled pending the resolution of various issues between the joint venturers. The impact on the project’s value of further development delays is uncertain, although it is likely that a change of ownership structure for the joint venture would accelerate development; and . the Avontuur project is similarly at an early stage of its development. In addition, the tenement that forms the basis of the Avontuur project is the subject of a competing prospecting right claimed by a third party. In this context, while DCF analysis and analysis of comparable transactions suggest that the Avontuur project has significant value, any judgement regarding value is subject to considerable uncertainty.
Accordingly, a very wide range of views regarding the value of Aquila’s assets could reasonably be held.
The valuation includes a premium for control. The premiums implied by the valuation range relative to the share price prevailing prior to the announcement of the Offer are in the range of 58- 113%. Takeover premiums are typically in the range 20-35% depending on the individual circumstances. The premiums implied by Grant Samuel’s valuation are significantly higher than typically observed. In Grant Samuel’s view this is not unreasonable. Around 60% of Aquila’s shares on issue are held by Mr Tony Poli, Aquila executive chairman, Mr Charles Bass, Aquila co- founder, and Baosteel. A further 13% is currently held by MRL, the majority of which was acquired in June 2014 from two longstanding institutional investors. Accordingly, Aquila’s free float has been limited and its shares have been relatively illiquid, which could be expected to depress the share price. In addition, Aquila’s asset base, with earliest production (from Eagle Downs) only projected for 2017 and significant uncertainty regarding the development timetable for other assets, is likely to be significantly discounted by a share market focussed on short term earnings and yield. In short, there are good reasons to conclude that Aquila’s share price before the Offer was a very poor indicator of Aquila’s underlying value.
5.2 Methodology
Grant Samuel’s valuation of Aquila has been estimated by aggregating the estimated market value of its resources assets together with the realisable value of non-trading assets and adding net cash as at 31 December 2013. The value of the resources assets has been estimated on the basis of fair market value as a going concern, defined as the maximum price that could be realised in an open market over a reasonable period of time assuming that potential buyers have full information.
The valuation of Aquila is appropriate for the acquisition of the company as a whole and, accordingly, incorporates a premium for control. The value is in excess of the level at which, For personal use only use personal For under current market conditions, shares in Aquila could be expected to trade on the sharemarket. Shares in a listed company normally trade at a discount of 15-25% to the underlying value of the company as a whole (although this discount does not always apply).
The most reliable evidence as to the value of a business is the price at which the business or a comparable business has been bought and sold in an arm’s length transaction. In the absence of direct market evidence of value, estimates of value are made using methodologies that infer value
36
from other available evidence. There are four primary valuation methodologies that are commonly used for valuing businesses:
. capitalisation of earnings or cash flows; . discounting of projected cash flows; . industry rules of thumb; and . estimation of the aggregate proceeds from an orderly realisation of assets.
Each of these valuation methodologies has application in different circumstances. The primary criterion for determining which methodology is appropriate is the actual practice adopted by purchasers of the type of business involved.
Grant Samuel’s primary approach to the valuation of Aquila’s assets has involved the application of the DCF methodology. The discounted cash flow methodology involves the calculation of net present values by discounting expected future cash flows. Projected cash flows are discounted to a present value using discount rates that take into account the time value of money and risks associated with the cash flows. The discounted cash flow methodology is particularly appropriate for assets such as resources projects where reserves are depleted over time and significant capital expenditure is required. By contrast, capitalisation of earnings or cash flows is the most commonly used method for valuation of industrial businesses. This methodology is most appropriate for industrial businesses with a substantial operating history and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. This methodology is not particularly suitable for start-up businesses, businesses with an erratic earnings pattern or businesses that have unusual capital expenditure requirements. This methodology is in particular not suitable for the valuation of Aquila’s business operations which have high upfront capital expenditure requirements and substantial variations in cash flows and earnings in the early years.
Grant Samuel undertook cash flow models for Aquila’s Eagle Downs, Washpool, West Pilbara and Avontuur projects on the basis of operating scenarios developed by AMC, which were based on project development and production plans provided by Aquila. AMC reviewed each of the technical assumptions in Aquila’s operating models, including those regarding reserve estimates, production profiles, operating costs, capital costs and the potential for reserve extensions, and made adjustments to these assumptions when appropriate. Grant Samuel determined the economic and financial assumptions used in the cash flow models. The net present values of the Eagle Downs, Washpool, West Pilbara and Avontuur projects have been calculated on an ungeared after tax basis as at 1 January 2014.
Alternative valuation methodologies have been considered as secondary evidence of value as to the value of certain of the assets. In particular, the estimates of value have been reviewed to the extent possible and appropriate in terms of multiples of reserves and resources of coking coal, iron ore and manganese (as applicable), which are metrics commonly used to assess values in the mining sectors. The valuation metrics, while relatively crude, are useful in assessing the reasonableness of a discounted cash flow valuation since the discounted cash flow valuation is typically sensitive to the assumptions adopted.
The valuations of Aquila’s interests in the Eagle Downs, Washpool, West Pilbara and Avontuur projects represent Grant Samuel’s overall judgement as to value. They do not rely on any one
For personal use only use personal For particular scenario or set of economic assumptions. The valuations have been determined having regard to the sensitivity of the DCF analysis to a range of technical and economic assumptions. They incorporate Grant Samuel’s judgemental assessment of the impact on value of development status and optionality, to the extent not reflected in the DCF analysis.
The valuations are based on a number of important assumptions, in particular assumptions regarding future coal, iron ore and manganese prices, and reflect the technical judgements of AMC regarding the prospects for Aquila’s development assets. Coal, iron ore and manganese prices and
37
expectations regarding future operating parameters can change significantly over short periods of time. Such changes can have significant impacts on underlying value. Accordingly, while the values estimated are believed to be appropriate for the purpose of assessing the Offer, they may not be appropriate for other purposes or in the context of changed economic circumstances or different operational prospects for Aquila’s assets.
5.3 Resources Projects and Optionality
The conventional discounted cash flow methodology implicitly assumes that the rate of output from a mining operation is pre-determined. This methodology ignores the value inherent in management’s ability to vary production and other operating parameters in reaction to changes in commodity prices or other circumstances. Management may change the rate of production of a mine, close or re-open the mine or in certain circumstances even abandon it. Accordingly, a mine may be regarded as an option (or series of options) over the resources it contains.
The value of management flexibility is illustrated by the example of a marginal mine, where the marginal cash production cost is equal to expected revenue. Application of the conventional discounted cash flow methodology would result in the estimate of a zero value for the mine. In reality, however, the mine will have some value, because management is able to reduce or cease production if marginal revenue falls below the marginal cash cost of production and to resume or increase production if commodity prices rise.
Similarly, the designs and long term development alternatives for many mines allow management to change operating plans in the light of future commodity prices and operating costs. Life of mine plans frequently involve mining marginal ore, making additional cut backs or making other operational decisions at some point in the future. However, management is commonly not required to commit to such decisions at the commencement of the mining project. Firm commitments are only required much later in the project, at which time management will be able to make decisions on the basis of the commodity prices and other circumstances then prevailing. The mining operations as they relate to (for example) the mining of marginal ore or a final cut back may be thought of as a series of call options exercisable at the marginal mining costs to be incurred at the time. These options represent additional value not captured by the conventional discounted cash flow methodology.
An alternative perspective is that management flexibility results in changes in commodity prices having an asymmetric impact on the value of a mining operation. If commodity prices rise unexpectedly, the mine will earn greater revenue (and may be able to mine additional mineralisation not originally scheduled for production). If commodity prices fall unexpectedly, production will be curtailed or, in the worst case, stopped. The mine will not continue, in the long term, to be operated at a cash operating loss. By contrast, deterministic valuation models implicitly assume that there is some possibility of the mine operating on a long term basis at a cash operating loss, in the same way that it implicitly assumes that the mine may earn “super profits” as a result of a persistent increase in commodity prices.
Grant Samuel is aware of valuation methodologies which attempt to incorporate the option value associated with management flexibility, using a combination of conventional discounted cash flow analysis and option theory. However, the application of these methodologies is impractical in the context of the complex and unpredictable nature of mining operations. In making judgments on value, Grant Samuel has given general consideration as to the characteristics of the various mining operations and the value of management flexibility or underlying option value implicit in those
For personal use only use personal For characteristics. In particular, Grant Samuel has considered the extent to which:
. operations are marginal or incorporate significant resources, not currently planned for mining, of marginal economics (i.e. the operations represent or incorporate options “close to the money”); and
. length of mine life or other characteristics give management flexibility over the conduct of mining operations.
38
The valuation of each project includes a subjective assessment of the real option value inherent in the project.
5.4 Valuation Assumptions
The valuation of Aquila’s development projects has principally been determined by reference to DCF valuation analysis. This analysis involves making a number of general assumptions regarding future coal, iron ore and manganese prices, economic factors and discount rates. The DCF analysis results in the calculation of estimated net present values (“NPV”) under a range of assumptions. The calculated NPVs are sensitive to the assumptions used in the analysis and relatively small changes in certain variables can cause significant changes in value. For this reason, DCF valuations should be treated with caution. Asset specific assumptions are discussed below.
5.4.1 General Assumptions
Grant Samuel has made the following assumptions: . Australian inflation rates of 2.5% per annum; . a A$:US$ exchange rate of A$1.00=US$0.92 declining in line with forward market estimates to A$1.00=US$0.84 in the long run; . a flat real (2014) USD:ZAR exchange rate of 10.36, and ZAR inflation consistent with the USD forward curve until 2019; . royalties in accordance with legislated rates; . tax depreciation schedules determined on the basis of tax written down values for various asset categories. Accumulated carry forward expenditures deductible for tax purposes have been allowed for in the financial models. . Australian corporate tax rate of 30%; . South African tax rate of 28%. Capital expenditure is deductible for tax purposes in the year it is incurred; and . nominal discount rates for the discounted cash flow valuations in the range 9.5-10.5%. The discount rates represent estimates of the costs of capital for iron ore, coal and manganese producers, derived both in world markets and in the Australian market. The rates are estimates of weighted average costs of capital and have been applied to expected future ungeared nominal after-tax A$ cash flows. The basis for the selection of the rates is set out in Appendix 2.
5.4.2 Coal Prices
Grant Samuel has assumed long term benchmark premium hard coking coal prices of US$155-165/t (in 2014 real terms). The following table sets out coal pricing assumptions used in the models and prices observed from available brokers’ and analysts’ projections and industry research:
For personal use only use personal For
39
Benchmark Premium Hard Coking Coal Price Projections Year ended 30 June Long US$/t (real) 2014 2015 2016 2017 2018 Term Grant Samuel 140 138 150 152-155 154-160 155-165 Brokers, Analysts,
Industry research low-high 127-165 126-167 140-170 141-172 n.a. 137-183 median 140 138 150 156 n.a. 161
In estimating future benchmark hard coking coal prices, Grant Samuel had regard to available brokers’ and analysts’ projections22 for benchmark coal prices (Australia to Asia) and available market commentary relating to global coal prices in future years. Most available projections extended to 2017.
Although there are differences in brokers’ and analysts’ expectations of future coal prices, and in some cases these differences are significant, there are a number of common themes and expectations that explain the trends observed in their average coal price projections. In the short term, oversupply is expected to place pressure on hard coking coal prices with higher cost mines closed or placed on care and maintenance and new projects deferred. However, in the medium and longer term the continuation of strong demand for coking coal, with Asia driving global growth in consumption, is expected to result in a recovery and upward trend in coking coal prices. Grant Samuel’s long term hard coking coal price assumptions compared to historical prices are shown below:
Australian Hard Coking Coal Prices to Japan (January 2008 - June 2014)
$350
$300
$250
$200
$150 Price (US$/t FOB) $100
$50
$0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Source: IRESS Note: Historical prices are in nominal terms whereas Grant Samuel’s long term price assumptions are in real terms.
5.4.3 Iron Ore Prices For personal use only use personal For Iron ore fines are typically priced by reference to a benchmark with a premium or discount applied to reflect the relative qualities of the products.
22 Based on a review of 16 available broker and market analyst projections extracted from information sources available to Grant Samuel. Not every broker/analyst provided benchmark coal price projections for each of the future periods discussed above.
40
The valuation of Aquila’s interest in the West Pilbara project was based on expectations of future iron ore prices and product discounts prevailing in early June 2014. Grant Samuel has assumed iron ore fines prices in the range of US¢130-145 per percent of iron in a dry metric tonne (FOB, in real terms) from 2020 for valuation purposes. This corresponds to approximately US$80-90/dmt for the benchmark iron ore Australian fines grading 62% iron (FOB) and US$90-100/dmt for the same product delivered in China (CFR). Grant Samuel’s long term iron ore price assumptions compared to historical prices for the benchmark are shown below:
China Import Iron Ore Fines spot - 62% Fe (Tianjin Port) (November 2008 - June 2014)
$200
$150
$100 Price (US$/dmt) $50
$0
Source: Bloomberg Note: Historical prices are in nominal terms whereas Grant Samuel’s long term price assumptions are in real terms.
Whilst Grant Samuel’s iron ore price assumptions are at the lower end of historical prices, they are broadly consistent with the price forecasts used by market analysts which ranged from US$70/t to US$105/t with a median of US$79/t for the benchmark iron ore Australian fines grading 62% iron (FOB)23. They reflect a view that supply sources brought on line in recent years will continue to put pressure on iron ore prices.
Grant Samuel has assumed that West Pilbara Fines, the main product to be sold by the West Pilbara project, would be sold at a 10% discount to benchmark prices.
The value of Aquila’s interest in the West Pilbara project could vary significantly with changes in iron ore price expectations. The assumptions in relation to future iron ore prices adopted by Grant Samuel do not represent forecasts by Grant Samuel but are intended to reflect the range of assumptions that could reasonably be adopted by industry participants in relation to West Pilbara.
5.4.4 Manganese Prices
The valuation was based on current manganese prices and expectations of future For personal use only use personal For manganese prices prevailing in early June 2014. Grant Samuel has assumed long term manganese prices (in 2014 real terms) in the range US$4.75-5.75 per dmtu for 44% Mn grade ore (FOB) from 2019. The price assumptions compared to historical prices are shown below:
23 Based on a review of 14 available broker and market analyst projections extracted from information sources available to Grant Samuel. Not every broker/analyst provided long term benchmark iron ore price projections.
41
Manganese Benchmark Prices (Oct 2012 - Jun 2014) $7.00
$6.00
$5.00
$4.00
$3.00
Price (US$/dmtu) $2.00
$1.00
$0.00 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Metal Bulletin 44% Mn Ore Cif Tianjin Metal Bulletin 38% Mn Ore FOB Port Elizabeth
Source: Bloomberg Note: Historical prices are in nominal terms whereas forecast price assumptions are in real terms.
The manganese price assumptions are broadly consistent with the range of price forecasts used by market analysts. However: . manganese is not widely covered by market analysts and analysts’ forecasts represent a relatively limited data set; . the manganese price has been fairly volatile, generally trading in a range of approximately US$4.25-5.80 per dmtu (44% CIF) in the last year and a half; . the industry benchmark for manganese has changed in recent years, meaning that historical prices are less relevant for the purposes of determining assumptions regarding future pricing; and . the pricing for Avontuur product has been based on 44% ore grade (CIF), adjusted for shipping and insurance costs, with product discounts for grade and other factors.
The value of Aquila’s Avontuur interest could vary significantly with changes in manganese price expectations. The assumptions in relation to future manganese prices adopted by Grant Samuel do not represent forecasts by Grant Samuel but are intended to reflect the range of assumptions that could reasonably be adopted by industry participants in considering the value of Avontuur.
5.5 Valuation of Aquila’s Mining Assets
5.5.1 Eagle Downs
Aquila’s 50% interest in Eagle Downs has been valued in the range $400-500 million.
Net Present Value Analysis For personal use only use personal For Grant Samuel prepared cash flow models for the Eagle Downs project based on four valuation scenarios. The cash flow models are based on Aquila’s detailed financial model with production, capital and operating projections developed by AMC using information provided by Aquila.
The AMC production cases assume that the Eagle Downs production is exported through WICET but the potential exists to reduce transport costs by selling the coal through DBCT. Grant Samuel has overlayed two transport options to AMC’s production cases to assess
42
their impact on the project NPVs. Grant Samuel’s cases 1 and 2 are based on the mining and processing volumes and costs of AMC’s production case 1 and Grant Samuel’s cases 3 and 4 are based on the mining and processing volumes and costs of AMC’s production case 2. Accordingly, the valuation scenarios considered by Grant Samuel are:
. Case 1 – this scenario reflects the current single longwall development plan for Eagle Downs based on the definitive feasibility study adopted by the joint venture. It assumes the following:
the Eagle Downs operation mines and processes 259Mt of ROM ore, consisting of 254 Mt of reserves and 4.7 Mt of other material. The mine life is 48 years and total production is 151Mt of saleable hard coking coal;
first coal production is in the April-June 2016 quarter. Annual production averages 4.5Mtpa over the first 10 years following ramp up and 3.2Mtpa over the life of the mine. For valuation purposes, relative to the definitive feasibility study and pre-feasibility study production scenarios, AMC has delayed the completion of project construction by six months and reduced the rate of production ramp-up;
cash costs average $91.8/t FOB of saleable production (excluding royalties) over the life of the mine;
total development costs to the first 100,000 tonnes of longwall production are $1.4 billion and sustaining capital expenditure averages $8.4/t of saleable production resulting in total capital costs over the life of the mine of $3,503 million; and
Aquila’s share of Eagle Downs coal is sold into export markets through a combination of existing WICET port capacity of 1.6Mtpa and access to additional capacity through DBCT;
. Case 2 – is the same as Case 1 but assumes that Aquila secures sufficient capacity through DBCT for its entire share of Eagle Downs coal. WICET port capacity of 1.6Mtpa is assumed to be utilised for the Washpool coal project. The shorter haulage distances and lower port costs at DBCT reduce cash operating costs to $88.7/t FOB of saleable production (excluding royalties) over the life of the mine;
. Case 3 – this scenario reflects a two longwall expansion for Eagle Downs. During the pre-feasibility study for Eagle Downs (before the definitive feasibility study) the potential to simultaneously operate two longwalls and accelerate production at Eagle Downs was identified. This scenario is based on a high level conceptual mining plan considered as part of the pre-feasibility study in June 2009 with costs subsequently updated by Aquila management. It assumes the following:
sequential longwall mining of the Harrow Creek Upper and Dysart seams with the concurrent longwall mining of the Harrow Creek Lower seam from 2020. Total production over the life of mine is the same as Case 1. As for Case 1, AMC has delayed the completion of project construction by 6 months, and reduced the rate of production ramp-up;
For personal use only use personal For peak production of 8.7Mtpa with average production over the first full 10 years of 6.8 Mtpa;
a 29 year mine life as a result of the higher production rates;
average cash costs of $84.2/t FOB of saleable production (excluding royalties), reflecting cost savings and efficiencies from the expansion;
43
an additional $323 million of capital expenditure for an expanded CHPP and additional ventilation shafts. Sustaining capital expenditure averages $8.4/t of saleable production. Capital costs over the life of the mine total $3,828 million;
the sale of Aquila’s share of Eagle Downs coal into export markets through a combination of existing WICET port capacity of 1.6Mtpa and access to additional capacity through DBCT; and
. Case 4 – is the same as Case 3 but assumes that Aquila secures sufficient capacity through DBCT for its entire share of Eagle Downs coal. Cash operating costs average $81.2/t FOB of saleable production (excluding royalties) over the life of the mine.
Aquila’s Take or Pay contract for WICET for 1.6Mtpa commences in January 2015 and extends to 2025. The current production scenarios for Eagle Downs (and Washpool) mean that Aquila will incur a take or pay liability until approximately 2019 until Aquila’s share of coal production reaches 1.6Mtpa. This liability is separately valued in Section 5.6.
Eagle Downs is expected to produce a single hard coking coal product with low-volatile coking properties that will make it attractive to steel makers and merchant coke producers. Pricing is expected to be by reference to benchmark premium hard coking coal prices with a small discount reflecting the specific coking characteristics of Eagle Down’s hard coking coal. For the purposes of the models, Grant Samuel has incorporated these pricing relativities into its pricing estimates for Eagle Downs hard coking coal.
The results of the NPV analysis for each of the Cases are set out below. They represent Aquila’s 50% interest in Eagle Downs:
Eagle Downs – NPV Analysis (Aquila’s Interest) Long Term Benchmark Premium Hard Coking Coal Price $ millions Discount Rate US$155/t US$160/t US$165/t Case 1 9.5% 345 416 489 10.0% 287 353 421 10.5% 235 297 360 Case 2 9.5% 437 508 580 10.0% 376 442 509 10.5% 320 382 446 Case 3 9.5% 581 679 778 10.0% 511 603 697 10.5% 446 533 622 Case 4 9.5% 673 771 870 10.0% 600 692 785 10.5% 532 619 707
Grant Samuel’s valuation of Aquila’s 50% interest in Eagle Downs in the range $400- 500 million reflects the NPV analysis summarised above and takes into account the following factors:
For personal use only use personal For . Eagle Downs has a large reserve base of high quality hard coking coal which supports a long mine life. Eagle Downs is located next to BMA’s Peak Downs mine and targets the same coal but further down dip and at greater depth. Eagle Downs is expected to be a low cost producer with cash costs in the first quartile of metallurgical coal producers;
. Eagle Downs is currently under construction with first coal targeted in 2016 and longwall production commencing in 2017/2018. Whilst the project is largely de-
44
risked, residual commissioning risk for the longwall may delay production (beyond AMC’s assumed slower construction and ramp up) and increase costs;
. the mine plan under the single and two longwall production scenarios is based on current reserves of 254Mt. Total resources are 959Mt with measured and indicated resources of 819Mt. Resources outside current reserves are at depths greater than 700m. Given this greater depth, the prospects of recovering this coal utilising current mining methods are considered poor;
. reserve estimates assume Longwall Top Coal Caving (LTCC) in the Harrow Creek Lower and Dysart seams. There has been limited application of this mining method in the Bowen Basin. As a result there are uncertainties regarding the coal yield from LTCC. In addition, if difficulties associated with faulting in the seams are greater than expected, coal yields may be lower than currently assumed;
. the value of Eagle Downs is extremely sensitive to movements in coal prices. A US$5/t increase (decrease) in the benchmark premium hard coking coal price increases (decreases) calculated NPVs by approximately $70m (based on the assumed A$:US$ exchange rates);
. utilising DBCT to export coal has a material impact on value due to lower haulage distances and port charges. However, other than Aquila’s existing WICET port capacity of 1.6Mtpa, rail and port arrangements to cover Aquila’s entire share of production from Eagle Downs has not been secured. Aquila is investigating options to secure rail capacity on the Blackwater rail system to transport coal to WICET and rail and port capacity for DBCT. It may have the opportunity to secure capacity as port contracts at DBCT come up for renewal over the next two years. Moreover, opportunities may arise to purchase capacity on the secondary market from other shippers. However, it is uncertain how long this will remain available (particularly if coal prices increase); and
. the option to expand production through a second longwall has the potential to add significant value. However, the focus of the Eagle Downs joint venture is to successfully construct and commission the first longwall and consideration of an expansion is unlikely to occur before then. It is not uncommon for coal companies to pursue expansions incrementally (and often on an ‘as required’ basis), particularly in the current market environment of lower coal prices. However, the plans for a second longwall are conceptual at this stage and, whilst multiple seam longwall operations are not uncommon, the development and operating complexity and risks are higher. Consequently, in assessing the valuation range in the context of the DCF analysis, Grant Samuel has incorporated only modest incremental value for this expansion opportunity.
Multiple Analysis Grant Samuel’s value range of $400-500 million for Aquila’s 50% interest in Eagle Downs implies the following multiples of reserves and resources:
Eagle Downs – Implied Valuation Parameters
24 Valuation Range Variable For personal use only use personal For (Mt) Low ($/t) High (t/$) Multiple of reserves 127.0 3.15 3.94 Multiple of resources 479.5 0.83 1.04 Multiple of measured & indicated resources 409.5 0.98 1.22
24 Attributable reserves and resources (i.e. 50% of total reserves and resources).
45
The multiples implied by Grant Samuel’s valuation have been compared with reserve and resource multiples implied by the share prices of selected listed Australian coal companies, transactions involving Australian coal companies and asset level transactions.
Reserve and resource multiples provide a high level valuation cross check of the valuation of Eagle Downs. Reserve and Resource multiples can vary considerably as a result of differences in mine type, stage of development, maturity of coal assets, diversity of coal assets, coal quality, mine cost structures, the proportion of proved up reserves and the level of Inferred resources, geological or technical factors and coal price environment. These differences need to be taken into consideration when analysing the trading multiples of listed participants in the sector and multiples implied by transactions. Nonetheless, the market ratings of listed companies and transaction multiples provide some guidance for the purposes of the valuation of Eagle Downs.
Trading Multiples Grant Samuel has reviewed share market ratings of Australian listed companies with coal mining operations in Australia. The following chart sets out the reserve and resource multiples implied by the share prices of the selected listed companies:
Comparable Listed Companies - Resource Multiples (A$/t)
1.60 Explorers & Developers Producers 1.40
1.20
1.00 Eagle Downs: A$0.83-1.04/t
A$/tonne 0.80
0.60
0.40
0.20
0.00 Coalbank East Bandanna Stanmore Acacia Malabar Guildford Cockatoo New Whitehaven WollongongYancoal Energy Energy Coal Coal Coal Coal Coal Hope Coal Resources
Source: Grant Samuel analysis (see Appendix 3).
For personal use only use personal For
46
Comparable Listed Companies - Reserve Multiples (A$/t)
9.00 Explorers & Developers Producers 8.00
7.00
6.00
5.00 A$/tonne 4.00 Eagle Downs: A$3.15-3.94/t 3.00
2.00
1.00
0.00 Bandanna Stanmore Malabar Cockatoo New Hope Whitehaven Wollongong Yancoal Energy Coal Coal Coal Coal
Source: Grant Samuel analysis (see Appendix 3).
The multiples vary significantly, ranging from $0.04/t to $0.60/t of reserves and $0.01/t to $0.08/t of resources for companies with projects in the exploration and development phase and $2.13/t to $7.84/t of reserves and $0.56/t to $1.46/t of resources for companies with mines in production.
In analysing the comparable company trading multiples, the following factors should be taken into account:
. the multiples are based on share market prices and do not reflect a premium for control;
. each coal company has a unique mix of coal types, production outlook and other specific factors:
Yancoal operates seven mines based in the Hunter Valley in New South Wales and Bowen Basin in Queensland producing coking coal and thermal coal. Yancoal has a limited free float of 8% and high gearing with debt of approximately $5.2 billion. Yancoal’s major shareholder, Yanzhou (78% shareholding), announced a proposal to privatise the company in July 2013 but withdrew the proposal in March 2014 based on softening coal market conditions;
Wollongong Coal operates thermal coal mines in the southern region of New South Wales. Jindal Group holds over 70% of Wollongong Coal. The company has raised in excess of $120 million in equity capital to pay down debt and fund capital investment at its mines. Brokers have noted that the company is likely to require an additional $450-$500 million over the next few years in order to meet ongoing capital investment for its two coal assets;
Whitehaven Coal has operating thermal coal and PCI coal mines based in the For personal use only use personal For Gunnedah Basin of New South Wales. Whitehaven recently commissioned the 6Mtpa Narrabri long wall mine and is currently developing the large and low- cost 10.8Mtpa SSCC and thermal coal Maules Creek mine;
New Hope has low cost thermal coal operations based in South East Queensland, ownership of QBH, a multi-user port facility at the port of Brisbane, investments in the oil and gas sector and approximately $1.2 billion of cash. It is seeking an
47
expansion approval for the New Acland mine up to 7.5Mtpa but timing is currently uncertain; and
in general, the earlier stage of development, lack of access to rail and port infrastructure and funding requirements of explorers and developers is reflected in their lower reserve and resource multiples; and
. in the current softer coal market environment, listed coal companies are trading at significant discounts to broker and analyst discounted cash flow valuations. Consequently, the multiples implied by the valuation of Eagle Downs could be expected to be at the top end of the range of multiples implied by the share prices of listed coal companies.
Transaction Multiples Grant Samuel has reviewed transactions since 2007 involving Australian companies focussed on coking coal operations and project level transactions involving coking coal assets. The transactions provide evidence of prices that acquirers were willing to pay for operating and prospective coal projects:
For personal use only use personal For
48
Comparable Transactions - Resource Multiples (A$/t)
% M&I2 3.55 Dec 07 Foxleigh Mine (70.0%) / Anglo American na 2.05 Feb 08 Narrabri (7.5%) / Yudean 69% 3.55 Jul 08 New Saraji Coal Project (100.0%) / BHP-Mitsubishi (BMA) 23% 3.80 Aug 08 Narrabri (7.5%) / J-Power 69% 3.93 Aug 08 Narrabri (7.5%) / EDF Trading 69% 4.14 Aug 09 Narrabri (7.5%) / Korean Investors 69% 0.18 Jun 10 Belvedere Hard Coking Coal project (24.5%) / Vale 40% Jun 10 Belvedere Hard Coking Coal project (24.5%) / Vale 40% 0.25 Jul 10 Sutton Forest (70.0%) / POSCO 100% 0.62 Aug 10 Middlemount (50.0%) / Gloucester 99% 6.16 Aug 10 MDL 162 (90.0%) / Macarthur Coal 62% 1.68 Dec 10 Maules Creek (15.0%) / ITOCHU 72% 3.77 Oct 11 Maules Creek (10.0%) / J Power 70% 5.45 May 11 Codrilla Project (13.8%) / Coppabella and Moorvale JV (CMJV) 65% 6.85 1 Dec 11 Aston Resources (100.0%) / Whitehaven 65% 3.86 1 Dec 11 Gloucester Coal (100.0%) / Yancoal Australia 66% 1.24 Apr 12 Isaac Plains (50.0%) / Sumitomo 74% 6.72 Jul 12 Sonoma mine (45.0%) / Qcoal and JSS 53% 1.84 1 May 12 Rockland Richfield (100.0%) / Linyi Mining Group 8% 0.39 1 May 12 Coalworks (100.0%) / Whitehaven na 0.14 Eagle Downs: A$0.83-1.04/t (85% M&I) 1 Oct 12 Endocoal (100.0%) / U&D Mining Industry (Australia) 18% 0.14 1 Jan 13 Idalia Coal (100.0%) / East Energy Resources na 0.11 Mar 13 Vickery South Project (29.0%) / Whitehaven na 2.02 1 Aug 13 Coalbank (75.0%) / Loyal Strategic Investments 32% 0.01 1 Aug 13 Gujarat NRE Coking Coal (22.1%) / Jindal Steel and Power na 1.47 1 Oct 13 Blackwood Corporation (100.0%) / Cockatoo Coal na 0.05 1 Dec 13 Carabella Resources (100.0%) / China Kingho Energy Group 72% 0.39 Jan 14 MDL 162 (100.0%) / Wesfarmers 63% 0.27 Bowen Basin
Note: 1. Corporate transactions. 2. % M&I = percentage of measured and indicated resources to total resources Source: Grant Samuel analysis (see Appendix 3)
Comparable Transactions - Reserve Multiples (A$/t)
Dec 07 Foxleigh Mine (70.0%) / Anglo American 17.17 Feb 08 Narrabri (7.5%) / Yudean 8.76 Aug 08 Narrabri (7.5%) / J-Power 16.23 Aug 08 Narrabri (7.5%) / EDF Trading 16.76 Aug 09 Narrabri (7.5%) / Korean Investors 10.55 Aug 10 Middlemount (50.0%) / Gloucester 13.25 Dec 10 Maules Creek (15.0%) / ITOCHU 6.46 Oct 11 Maules Creek (10.0%) / J Power 11.25 May 11 Codrilla Project (13.8%) / Coppabella and Moorvale JV (CMJV) 10.88 Dec 11 Aston Resources (100.0%) / Whitehaven1 7.23 Dec 11 Gloucester Coal (100.0%) / Yancoal Australia1 7.83 Apr 12 Isaac Plains (50.0%) / Sumitomo 17.30 Oct 12 Endocoal (100.0%) / U&D Mining Industry (Australia)1 5.53 Aug 13 Gujarat NRE Coking Coal (22.1%) / Jindal Steel and Power1 9.78 Dec 13 Carabella Resources (100.0%) / China Kingho Energy Group 1 5.86 Jan 14 MDL 162 (100.0%) / Wesfarmers 1.04 Eagle Downs: A$3.15-3.94/t Bowen Basin
Note: 1. Corporate transactions Source: Grant Samuel analysis (see Appendix 3)
In analysing the charts above, the following factors should be taken into account:
. the multiples may be affected by issues such as quality and composition of coal portfolios, mix of operating and development assets, stage of development and associated development risk, competitive position, as well as synergies, cost savings,
off-take arrangements and strategic benefits available to the acquirer; For personal use only use personal For . the evidence provided relates to transactions over a seven year period. The coal pricing environment at the time of each transaction needs to be considered when interpreting the multiples. In this regard, transactions between 2007 and mid-2012 reflect a period during which coal prices (and consequently many coal company and asset valuations) reached all-time highs. More recent transactions imply lower multiples; and
49
. a number of transactions involving project level interests included significant long term off-take arrangements for coal in excess of the share of the project acquired (e.g. Narrabri and Maules Creek transactions). Consequently, the price paid will factor in the strategic benefit of long term off-take arrangements.
Analysis and Conclusion In Grant Samuel’s view the reserve and resource multiples for comparable companies and transactions broadly support the multiples implied by the valuation range for Eagle Downs after taking into account the following factors:
. the stage of development of Eagle Downs; . the observation that listed companies are trading at a significant discount to discounted cash flow valuations of brokers and analysts and that share trading multiples exclude a premium for control; and
. the wide range of multiples implied by transaction values, which makes it difficult to draw definitive conclusions, particularly given that most of the transactions occurred in a more buoyant coal price environment.
5.5.2 Washpool
Aquila’s Washpool project has been valued in the range $25-50 million.
Net Present Value Analysis Grant Samuel prepared a cash flow model for the Washpool project based on Aquila’s detailed financial model with production, capital and operating projections developed by AMC using information provided by Aquila.
The valuation scenario considered by Grant Samuel is based on the DFS completed in 2011 and the Supplementary Study completed in April 2014. It assumes the following:
. the mining of 96.5Mt ROM ore over a 15 year mine life, for the total saleable production of 39.2Mt of hard coking coal;
. commencement of project construction in July 2015 and first coal production in September 2016. This timing has been provided by AMC and results in a delay in the commencement of project construction by 12 months compared to Aquila’s modelling, due to the current status of approvals. Annual ROM production averages 6.4Mtpa over the life of the mine;
. a production yield of 41% through finer grinding of Washpool coal; . average cash costs (in real 2014$) of $125.6/t FOB of saleable production (excluding royalties) over the life of the mine;
. total development costs of $348.5 million (in real 2014$) and average sustaining capital expenditure (in real 2014$) of $0.60/t of saleable production over the life of
the mine; and For personal use only use personal For . coal sales into export markets through WICET, utilising Aquila’s existing WICET port capacity of 1.6Mtpa and access to additional capacity.
The following table summarises projected production and costs for the scenario:
50
Washpool – Model Parameters Year Ended 30 June Total/ Average 2015 2016 2017 2018 2019 2020 LOM ROM production (Mt) - - - 0.5 5.7 7.0 7.2 96.5 Average yield (%) - - - 24% 43% 40% 40% 41% Saleable production (Mt) - - - 0.1 2.4 2.8 2.9 39.2 Cash costs - - - 541.3 119.5 122.1 125.0 125.6 ($/t FOB excl. royalties real) Capital costs ($ m real) - - 221.1 137.2 (8.1)25 1.7 (2.6) 371.9 Source: AMC and Grant Samuel
Washpool’s standard coal product is expected to have an ash content of 15% and strong coking properties. Washpool’s higher than benchmark specification ash content for premium hard coking coal (7-8% benchmark specification) means that it is unlikely to be used in unblended form. A blending study conducted for Aquila in early 2014 concluded that:
. a coking coal blend consisting of one third Washpool coal and two thirds of a lower ash semi-hard coking coal (from the Rangal Coal Measures in the Bowen Basin) produced a blended hard coking coal with ash content of approximately 10%; and
. based on forecast coal prices for 2014 and assuming the blended coal is sold under long-term contracts or ongoing (evergreen) contracts, Washpool coal could achieve a price equivalent to 11.6% below long term premium hard coking coal benchmark prices.
The price discount is likely to vary with coal prices but overall, for the purposes of the cash flow model, Grant Samuel has included a price discount for Washpool coal in a blended product.
The results of the NPV analysis are set out below:
Washpool – NPV Analysis Long Term Benchmark Premium Hard Coking Coal Price $ millions Discount Rate US$155/t US$160/t US$165/t Case 1 9.5% 65 126 183 10.0% 52 111 171 10.5% 40 96 154
Grant Samuel’s valuation of Washpool in the range $25-50 million reflects an overall judgement on value. The low end of the range reflects AMC’s assessment of the value of Washpool on an exploration value basis26. The high end of the range takes into account the NPV analysis summarised above and the following factors:
. Washpool is a low yield, high cost project (it is in the 4th quartile on the coal producers cost curve) and as illustrated above its value is extremely sensitive to coal prices. At current contract coal prices of US$120/t, Washpool would be loss making For personal use only use personal For (based on its average cash costs (in real 2014$) of $125.6/t) after taking into account royalties. An acquirer’s view on future coal prices will have a material impact on the price that an acquirer would be willing to pay for Washpool;
25 Negative capital expenditure represents a cash inflow and is predominantly from land sales. 26 AMC has valued the Washpool project in the range $30-37 million.
51
. Washpool is at an early stage of development. While a Mining Lease application has been submitted, a Mining Lease over the project has not yet been granted. Although considerable progress had been made in the approvals process, Aquila has not finalised land compensation agreements. This significant cost has not been approved by the Aquila Board. In addition, a draft Environmental Authority for the project has not been granted (and requires a number of other approvals to be finalised and approved). The early stage of development is not factored into the NPV analysis. It is clearly appropriate to significantly discount unrisked NPV values to take into account potential delays in obtaining the necessary approvals, construction risk and commissioning risk (albeit Washpool is a proposed open cut mine which would have lower execution risk than an underground longwall mine);
. there is risk associated with the fine grinding of Washpool coal to improve the yield, which is a new approach to coal treatment. While there have been some successful small scale studies, it has not been tested or used in a full scale project in the Australian coal industry. The impact that the process has on the quality of the coal (e.g. total moisture, coking properties) is also unknown;
. the high ash content of Washpool coal (of around 15%) means that it is unlikely to be saleable as a stand-alone product. It appears likely that Washpool coal will only be saleable as part of a blend with third party coal of lower grade but lower ash content. While there are coal producers located in the vicinity of Washpool that may be interested in producing a blended coal product, Aquila has had no discussions with third party coal producers about blending arrangements and there is no certainty that Aquila will be able to enter into such arrangements on acceptable terms;
. other than Aquila’s existing WICET port capacity of 1.6Mtpa, which may ultimately be utilised by coal from Eagle Downs (which is under construction), Aquila has no above or below rail or port access agreements in place in relation to Washpool. The NPV analysis assumes that all coal produced at Washpool is transported by rail and utilises port facilities at WICET. While there is currently surplus capacity at WICET it is uncertain how long this will remain available (particularly if coal prices increase) and it is also uncertain whether the proposed extension of WICET (Stage 2) will proceed; and
. Aquila undertook a sale process for Washpool in mid-2011 and confirmed in March 2012 that it was in advanced discussions with International Coal Ventures Limited (“ICVL”), a consortium formed by five state-owned Indian companies to acquire foreign mines, to acquire 100% of Washpool although no binding offer had been received. Press reports at the time indicated that the price ICVL offered for Washpool was $301 million, although this was not confirmed by Aquila. While this indicative offer is relevant as it is an offer from an arms’ length third party, coal prices in March 2012 were significantly higher than they are today (US$235/t in March 2012 compared to US$120/t in May 2014). The higher coal prices at the time would have had a significant impact on value (even had it been assumed that coal prices would revert to lower levels over time), particularly given Washpool’s relatively high cash operating costs. Press reports in September 2012 indicated that ICVL was considering pulling out of the sale process (which it ultimately did) as a result of falling coking coal prices.
For personal use only use personal For
52
Multiple Analysis Grant Samuel’s value range of $25-50 million for Aquila’s Washpool project implies the following multiples of reserves and resources:
Washpool – Implied Valuation Parameters Valuation Range Variable (Mt) Low ($/t) High ($/t) Multiple of reserves 108.3 0.23 0.46 Multiple of resources 196.7 0.13 0.26 Multiple of measured & indicated resources 134.6 0.19 0.38
The multiples implied by Grant Samuel’s valuation have been compared with multiples implied by the share prices of selected listed Australian coal companies and transactions involving Australian coal companies (refer to Section 5.5.1 and Appendix 3 for details). The multiples are considered to be reasonable taking into account the specific attributes of Washpool outlined above.
5.5.3 West Pilbara
Grant Samuel has valued Aquila’s interest in the West Pilbara project in the range $500- 700 million. Grant Samuel’s valuation of Aquila’s interest in the West Pilbara project reflects: . DCF analysis of two production scenarios for West Pilbara, based on technical advice provided by AMC. These scenarios both assume production life of around 15 years, leaving the majority of the project’s resources unexploited; . indicative analysis of the potential value that could be added through an extension of the life of the operations; and . AMC estimates of the value of the residual resources that would remain following completion of mining operations as contemplated in the DCF scenario analysis.
The 2010 feasibility study was limited to the mining of reserves defined in the Stage 1 mining areas, which are sufficient to support a 30Mtpa operation for a production life of around 15 years. Subsequent work demonstrates that a larger operation (with production capacity in the range 40-50Mtpa) would require relatively little additional capital expenditure and would deliver substantially improved economics.
Options for such a higher capacity development would include an acceleration of mining of the Stage 1 deposits to support annual production of 45Mtpa, followed by the development of the Hardey and/or Buckland Hills deposits, or a concurrent development of the Stage 1 mining areas and the Hardey (or other Stage 2) deposits. Deferral of the development of any of the Stage 2 mining areas would be expected to deliver maximum value, because it would allow the deferral of capital expenditure associated with the rail line extensions that would be required. Only limited work has been completed on the mine scheduling required to achieve 45Mtpa production from the Stage 1 mining areas, although detailed analysis of the scheduling and costs associated with mining the Hardey deposits has been completed. Accordingly, while such a scenario is likely to be sub-optimal, AMC and Grant Samuel
For personal use only use personal For have evaluated an expansion case based on the concurrent mining of Stage 1 and Hardey deposits to achieve production rates of 45Mtpa.
Case 1 is based on the development of the Stage 1 mining areas, construction of the processing facility, rail and port infrastructure contemplated in the feasibility studies completed in 2010, and mining of current reserves. AMC has largely adopted Aquila’s production, capital costs and operating costs with some minor amendments, including a one year delay. The main assumptions for Case 1 can be summarised as follows:
53
. commencement of construction in the September 2016 quarter, first production in the March 2020 quarter and completion of production in the December 2036 quarter;
. annual production of 30Mtpa resulting in total production over the life of the operations of 489Mt of ore consisting of 428Mt of West Pilbara Fines grading 57.2% iron and 61Mt of product grading 55.2% iron;
. total upfront capital costs of $7,443 million and sustaining capital expenditure at $308 million (real);
. operating costs of $31.3 per dry metric tonne of ore produced (FOB basis, including royalties, real); and
. residual value of $3.4 billion for the rail and port assets. None of the Stage 2 resources (i.e. from the Hardey and Mt Elvire/Buckland Hills areas) are exploited.
Case 2 assumes the same total production from the Stage 1 mining areas as for Case 1 but at the accelerated production rate of 35Mtpa which results in a shorter mine life (completion of production in early 2035). It also includes production of 133Mt of ore grading 60.4% iron at a production rate of 10Mtpa. The main assumptions for Case 2 are:
. production from the Stage 1 mining areas still assumed to commence in early 2020 and production from Hardey in the September 2020 quarter;
. production over the life of the operations totals 623Mt of ore consisting of 428Mt of West Pilbara Fines grading 57.2%, 61Mt of product grading 55.2% iron and 133Mt of fines at 60.4% iron;
. additional upfront capital costs of $1.8 billion relating mainly to the construction of the rail extension to Hardey and of a processing plant at Hardey, resulting in total capital expenditure over the life of the mine of $9,623 million (real);
. operating costs of $30.2 per dry metric tonne of ore produced (FOB basis, including royalties, real); and
. a residual value of $3.6 billion for the rail and port assets. Stage 2 resources in the Mt Elvire/Buckland Hills areas totalling 1.33 billion tonnes remain unexploited.
Grant Samuel has calculated net present values for the two scenarios for a range of assumptions regarding future iron ore prices and discount rates. The NPVs in the table below relate to Aquila’s share in the project:
West Pilbara – Results of Financial Analysis (Aquila’s Interest) LT Iron Ore Price (62%, FOB Pilbara) $ millions Discount rate US$80/dmt US$85/dmt US$90/dmt Case 1 9.5% 601 851 1,086 10.0% 446 682 905 10.5% 305 528 739
Case 2 9.5% 1,351 1,688 2,024 For personal use only use personal For 10.0% 1,146 1,466 1,783 10.5% 958 1,261 1,562
The results summarised above show the impact of relatively small changes in discount rates and iron ore price assumptions on the calculated NPVs, reflecting the high level of upfront capital required and the long life of the project:
54
. a US$5.00 per tonne difference in iron ore prices changes the NPV by approximately $230 million or $0.56 per share in Case 1 and by approximately $320 million or $0.78 per share in Case 2, based on a discount rate of 10.0%; and . a 0.5% difference in the discount rate changes the NPV by approximately $160 million or $0.39 per share in Case 1 and by approximately $215 million or $0.52 per share in Case 2, based on a future iron ore price of US$85/dmt.
Grant Samuel has also assessed the sensitivity of NPVs calculated in Case 2 to changes in key variables as follows (using a US$85/dmt iron ore price and a 10.0% discount rate): . variations of +/- 10% in capital costs; . variations of +/- 10% in operating costs; . variations of +/- 250 basis points on the discount to the benchmark iron ore price for the West Pilbara fines which corresponds to variations of approximately +/- US$2.00/dmt in the price received for the West Pilbara fines in the mid case benchmark price of US$85/t; and . 12-month delay.
The outcome of the sensitivity analysis is summarised below:
West Pilbara (Aquila’s Interest) – NPV Sensitivity Analysis
Case 1 NPV US$85/dmt LT, 10.0% WACC
Capex: +/- 10%
Opex: +/- 10%
Price discount: +/- 25%
Timing: 1 year delay
400 500 600 700 800 900 1,000
NPV ($ million)
Case 2
NPV US$85/dmt LT, 10.0% WACC
Capex: +/- 10%
Opex: +/- 10%
Price discount: +/- 25%
Timing: 1 year delay
1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900
For personal use only use personal For NPV ($ million)
These sensitivities do not represent the full range of potential value outcomes for the West Pilbara iron ore project. The net present value outcomes fall within a relatively wide range, highlighting the sensitivity of estimated NPVs to relatively small changes in assumptions.
55
The valuation scenarios assume that production from the West Pilbara project is limited to 15 years. In reality, the project would run for many years beyond this: . the rail and port infrastructure have a very long useful life, with ownership of the port to revert to the State of Western Australia 50 years after construction and the railway line potentially having a longer useful life; . even Case 2 assumes the mining of only 623 million tonnes of iron ore out of a total resource base of 2.2 billion tonnes. In particular, the production scenarios do not reflect the mining of the deposits in the Mt Elvire/Buckland Hills areas. In addition, there is exploration potential on the API JV’s tenements which could lead to resource extensions; and . there are a number of undeveloped iron ore deposits in the region that are currently “stranded” and would presumably seek access to West Pilbara’s rail and port infrastructure if any capacity was available.
The valuation scenarios described above attempt to capture part of this ongoing value by ascribing a continuing value to the rail and port infrastructure at the end of the mine life, based on estimated replacement values and residual asset life at the time. This estimated asset value contributes NPV (Aquila’s share) of $188 million in Case 1 and $230 million in Case 2. However, this is clearly an incomplete assessment of the ongoing value of the project, because it does not attribute any value to the resources that remain to be exploited after fifteen years of production, the mining infrastructure or the value associated with an ongoing mining operation.
AMC has attributed values in the range $58-88 million to Aquila’s interests in the deposits located in the Hardey areas and $101-341 million to the deposits located in the Buckland Hills area, on the basis of their values as undeveloped resources. This means that additional value of $159-429 million (i.e. the value for both Hardey and Buckland Hills) should notionally be added to estimated NPVs for Case 1, and additional value of $101- 341 million (i.e. the value of Buckland Hills resources) should be added to estimated NPVs for Case 2. Again, at a conceptual level this does not fully capture the value of a project life extension. AMC’s resource valuations are based on transactions involving deposits without access to infrastructure, whereas in reality the joint venture will be able to exploit its broader resource base through its mining and processing facilities and transport infrastructure.
An alternative approach would be to explicitly model cash flows expected to be generated through extension of the project life, including through exploitation of West Pilbara’s resource base and through selling access to the export infrastructure to third parties. No detailed projections for a project life beyond 15 years are available. To provide some indication of the additional value that might be generated through a project life extension beyond 15 years, Grant Samuel has undertaken indicative modelling based on the following: . a total project life of 50 years, at which point ownership of the port is assumed to revert to the State of Western Australia; . annual free cash flows for Case 1 of $1,200 million and for Case 2 of $1,800 million (100%). These are broadly consistent with the average free cash flows generated during the final two years of the initial 15 year operating life, and substantially less For personal use only use personal For than average annual free cash flows across the initial 15 year life of the operations (approximately $1,700 million for Case 1 and $2,500 million for Case 2 (100%)); and . an allowance for capital expenditure to develop new mines and associated infrastructure and to maintain/rebuild other facilities of $3.0 billion in Case 1 and $4.5 billion in Case 2 (100%) based on an assumption of $100 per tonne of production capacity which is broadly consistent with the upfront capital assumptions for Cases 1 and 2.
56
The modelling suggests incremental NPVs of approximately $420 million for Case 1 and $960 million in Case 2 (Aquila’s interest). The results should be treated with extreme caution, given the crude assumptions upon which they are based. However, they do support the general contention that extension of the mining operations beyond an initial 15 year period should deliver significant additional value.
Grant Samuel’s valuation of Aquila’s interest in West Pilbara in the range $500-700 million reflects the following factors:
. the project has attractive investment characteristics. It is located in an established iron ore producing area in a low sovereign risk jurisdiction. Extensive development studies have been undertaken and the project has a relatively large ore reserve available to underpin planned production. Although ore grades are a little lower than benchmark grades, West Pilbara is projected to have bottom quartile cash costs of production, reflecting in part its low waste stripping requirements;
. Aquila’s interest in West Pilbara is by way of a 50% joint venture interest, rather than through a holding that delivers unfettered control. The basis for development of the project, including financing arrangements, needs to be negotiated with Aquila’s joint venture partners. Differing objectives, time horizons, risk appetites and funding capacities as between the joint venture partners may make it difficult to reach agreement on how to take the development forward and result in delays in project construction;
. the DCF analysis suggests that the project offers sound economics. Nonetheless, the volume of funding required for the up-front capital expenditure (of the order of $8 billion) is such that financing may be challenging. The DCF analysis assumes that the project participants finance and retain control of all aspects of the operation, including the rail and port infrastructure. In reality, depending on the ownership of the project at the time of development it may be preferable (or necessary) to source third party equity funding for some or all of the infrastructure, which would result in third parties capturing some of the value estimated in the DCF analysis;
. additional work is required to fully define the project parameters (particularly for a higher production capacity development). The project (while not subject to any obvious unusual technical risks) is subject to development risk. The majority of the approvals required for the project are in hand, but a small number are still outstanding. In recent times a number of large scale Australian resources projects have experienced major cost overruns, although there now appears to be less pressure on costs than in recent years. The capital cost estimates were updated in 2012 and Aquila believes that there may be an opportunity to achieve lower costs than those projected, given the easing of construction cost pressures in the Pilbara;
. on the other hand, through their takeover offer for Aquila, Baosteel and Aurizon are clearly signalling their view that joint venture issues can and will be resolved, that the project is financeable on commercial terms and that it can be developed on a basis that delivers acceptable commercial returns.
The valuation of pre-development projects is inevitably subjective, given that there is no
For personal use only use personal For generally accepted basis for quantifying or adjusting for the development and other risks. Grant Samuel’s valuation of Aquila’s interest in West Pilbara in the range $500-700 million represents (at the bottom end of the range) only around 75% of the mid-point NPV for the 30Mtpa scenario and less than 35% of the mid-point NPV for the 45Mtpa scenario. Moreover, it effectively largely discounts the significant additional value likely to be achieved through an extension of the project’s life beyond the initial fifteen year period.
57
Inferring evidence as to the value of West Pilbara from the values of listed iron ore companies is problematic. There are very few listed iron ore companies that have as their only significant asset a substantial undeveloped iron ore project similar to West Pilbara. Sundance Resources Ltd (“Sundance”), which owns 90% of the Mbalam-Nabeba project, does provide some broad guidance as to the value that equity markets are attributing to undeveloped large scale iron ore projects. The project is similar in scale to the West Pilbara project, requires a substantial investment in rail and port infrastructure and is yet to commence construction.
The project straddles the border of the Republic of Cameroon and the Republic of Congo in West Africa. It has reserves of 436Mt (62.6% iron) within a high grade hematite resource of 775Mt (57.2% iron) and a low grade itabirite hematite resource of 4.0 billion tonnes (36.3% iron).
A definitive feasibility study and a pre-feasibility study completed in May 2011 contemplated a two stage development with production of 35Mtpa over a minimum 25 year period. Stage 1 will focus on the production of 35Mtpa of direct shipping ore for a minimum 10 years underpinned by the high grade hematite resource. Stage 2 is expected to extend the life of the project by more than 15 years through the production of a high-grade concentrate from the exploitation of the itabirite hematite resource. Development will require the construction of a 580km railway to connect the mines to a deep water port to be constructed on the Cameroon coast. Capital expenditure has been estimated at US$4.7 billion for Stage 1, of which 80% relates to the rail and port infrastructure, and US$3.1 billion for Stage 2. Cash operating costs were estimated at US$21/t for Stage 1 and US$42/t for Stage 2 excluding freight costs to China in the range of US$20-25/t. Sundance announced on 6 June 2014 that they had appointed a contractor to build the rail and port infrastructure. Construction is expected to commence in 2015.
As at 17 June 2014, Sundance had a market capitalisation of approximately $250 million and an enterprise value of approximately $270 million, which implies a value for the project of approximately $305 million. The project is subject to sovereign and development risk. There is an expectation that Sundance may need to accept significant dilution of its project interest to secure funding. It is likely that its market price reflects a material discount for these factors. Moreover, the share market value of Sundance represents a portfolio value (i.e. a value excluding a control premium). Whilst not directly comparable, the value of Sundance provides broad support for the value attributed by Grant Samuel to Aquila’s interest in the West Pilbara project in the range $500-700 million.
5.5.4 Avontuur
Grant Samuel has valued Aquila’s 74% interest in the Avontuur manganese project in the range $125-175 million.
The valuation reflects:
. DCF analysis based on a single development scenario for Avontuur, with key mining parameters as recommended by AMC;
. evidence as to value derived from transactions involving comparable manganese
deposits; and For personal use only use personal For . a subjective assessment of the possible impact on value of the tenure dispute in relation to Avontuur.
The DCF analysis for Avontuur is based on the DFS completed in 2011 and assumes the mining of reserves as stated at November 2011. AMC has adopted the production assumptions set out in the DFS, but has assumed a significant increase in operating and capital costs and a one year delay in the commencement of operations. The analysis is
58
based on a mine life of 17 years, with construction commencing in mid 2016 and production one year later. The following table summarises the production and nominal costs assumed for the DCF analysis:
Avontuur – Model Parameters (100%) Year ended 30 June Total/ Average 2017 2018 2019 2020 2021 2022 LOM Ore produced (000’s t) - 613 1,458 1,458 1,454 1,455 23,030 Mn grade (sold) (%) - 40.5 40.2 40.5 42.0 41.8 39.7 Cash costs ($/t ore nominal) - 394 300 260 416 283 194 Capital costs ($m nominal) 111 60 10 - 6 9 249
Grant Samuel has calculated net present values for a range of assumptions regarding future manganese prices and discount rates:
Avontuur – Results of Financial Analysis (Aquila’s Interest) Manganese LT Price $ millions Discount rate US$4.75/dmtu US$5.25/dmtu US$5.75/dmtu Avontuur Case 9.5% 102 241 361 10.0% 86 220 336 10.5% 73 201 313
The results summarised above show the impact of changes in manganese price assumptions on the calculated NPVs: a US$0.50/dmtu difference in the manganese price assumption changes the calculated value for Aquila’s Avontuur interest by approximately $116- 134 million or approximately $0.28-0.32 per share, based on a discount rate of 10.0%.
DCF based assessments of the value of Aquila’s Avontuur interest are subject to considerable uncertainty given the sensitivity of the value of the project to changes in manganese prices and the limited market information on which to base assumptions relating to future manganese pricing. Accordingly, Grant Samuel has also considered valuation evidence based on transactions involving comparable manganese deposits. These comparisons, while only crude indicators of value, do provide a useful cross-check of calculated NPVs.
Grant Samuel has analysed transaction evidence based on three transactions involving undeveloped manganese deposits in the vicinity of Avontuur in the Kalahari Manganese Field. These deposits were of similar size and grade to Avontuur. The transactions are analysed in more detail in Appendix 4. They imply transaction values in the range $5.55- 8.44/t of manganese in resource. On this basis, the transactions imply a value for Aquila’s interest in Avontuur in the range $223-339 million. Caution needs to be applied in extrapolating values from these transactions. They took place during times of significantly higher manganese prices than those currently prevailing and may have reflected expectations of project upside not reflected in stated manganese resources. However, they do indicate the willingness of industry participants to pay significant prices for undeveloped manganese deposits in the vicinity of Avontuur.
For personal use only use personal For An independent expert valued Avontuur in 2010 for the purposes of determining the notional buy-in price for Aquila’s BEE partner for its 26% interest in the project. The independent expert valued the project at US$263m, based on the then resource of 65Mt.
Grant Samuel’s valuation of Aquila’s Avontuur interest in the range $125-175 million takes into account the following:
59
. the project has a number of attractive characteristics. It is located immediately adjacent to the main Kalahari Manganese Field, one of the most prolific sources of manganese globally with a number of significant manganese mines in close proximity. The project economics appear robust and a significant proportion of the reserves are in the highest confidence proved category;
. the project remains subject to considerable development risk. Aquila is in the process of optimising the development concept and it appears that production is at best three to four years away, with many issues including financing and product transport arrangements still be to resolved;
. in the ordinary course this development risk would suggest that the project should be valued at a deep discount to calculated net present values. However, the transaction evidence shows that industry participants have been prepared to pay significant prices for undeveloped ore deposits; and
. valuation judgements are made more difficult by the competing claim for exploration rights over the Avontuur tenement. Grant Samuel is not in a position to assess the strength of Aquila’s legal position and offers no opinion in this regard. A summary of the legal issues prepared by Aquila’s South African lawyers suggests that Aquila has a strong case. However, there is inevitable risk in these circumstances, particularly given that the party asserting an overlapping exploration right is a company of which the shareholders are the governments of South Africa, Zambia and Zimbabwe.
Valuation judgements in these circumstances are somewhat artificial. In reality, parties interested in acquiring the project would almost certainly wait for resolution of the tenure issue before bidding for the asset, rather than seeking to acquire the project on the basis of some risked assessment of the likely outcome. For the purposes of the valuation of Aquila Grant Samuel has subjectively adopted a valuation range of $125-175 million. This represents a relatively deep discount to calculated net present values, reflecting both development risk and the tenure risks associated with the Avontuur tenement.
5.5.5 Exploration Assets
AMC has attributed the following values to Aquila’s exploration interests based on various valuation benchmarks:
Other Resources and Exploration Assets (Aquila’s Interest) AMC Value Range $ millions Low High Coal resources and exploration 40 109 Thabazimbi – Meletse 50 100 Other – Innawalley, Thabazimbi and Northern Cape 9 23 Total 99 232 Source: AMC
The Meletse deposit at the Thabazimbi iron ore project in South Africa contributes the most value to AMC’s assessed exploration values. The project has attractive attributes, including
For personal use only use personal For its location in an established iron ore producing area, access to infrastructure, good grades and very low levels of alumina and phosphorus. A concept-level study for the development of Meletse was completed in June 2013, but no feasibility study has been completed and no reserves have been declared for the project.
AMC’s valuation of Meletse reflects an indicative financial analysis based on the concept study as well as other exploration valuation methods. AMC’s valuation is set out in Section
60
6.2.3.1 of its report, which is attached as Appendix 5. AMC’s report also sets out further detail on AMC’s valuation of Aquila’s other resources and exploration interests.
5.6 Other Assets and Liabilities
Aquila holds investments in ASX-listed companies including an 18% stake in Red Hill Iron and a 10% interest in Cullen, the minority partners in the Red Hill and Mt Stuart joint ventures respectively. As at 17 June 2014, the value of Aquila’s investments was as follows:
Investments Number of Share Price Investment Entity shares held (cents) ($m) Red Hill Iron Limited 8,680,179 140 12.2 Cullen Resources Limited 102,343,426 1.3 1.3 Helix Resources Limited 7,681,293 3.0 0.2 Nucoal Resources Limited 18,000,000 1.2 0.2 Total 13.9 Source: Aquila, IRESS
Aquila retains a contingent asset in respect of an insurance claim related to a flood event at the Isaac Plains operation in December 2010. The company’s share of the claim lodged in May 2013 is $94.5 million after deductibles although the proceeds ultimately received could be significantly less. The company is currently in discussions with the insurer to resolve this claim and the timing of and eventual proceeds from the resolution of the claim remain uncertain. Grant Samuel is not in a position to make a judgement regarding a likely outcome. Grant Samuel has attributed a value of $30-60 million to Aquila’s share of the claim reflecting a broad range of potential outcomes and an allowance for the costs incurred in pursuing the claim. The range adopted does not reflect any view on the merits of Aquila’s position.
In October 2010, Aquila entered into an agreement with WICET to secure 1.6 Mtpa of port capacity to export its share of coal production from January 2015. Based on current development plans, Aquila does not expect to fully utilise its port allocation until Eagle Downs commences longwall operations in 2017 and the ability to sell or assign this allocation remains uncertain. Grant Samuel has valued the corresponding contingent liability at $30 million.
These other assets and liabilities are summarised as follows:
Other Assets and Liabilities $ millions Low High Listed investments 14 14 Insurance recovery 30 60 WICET take or pay obligation (30) (30) Total 14 44
5.7 Head Office Costs
Aquila’s head office costs, excluding costs incurred on behalf of the projects, have been estimated
For personal use only use personal For at approximately $13 million per annum. Any acquirer of Aquila would be able to save the costs associated with Aquila being a listed company (i.e. board fees and listing costs) as well as most finance, human resources, corporate development, legal and general head office costs. Grant Samuel has assumed residual corporate costs of approximately $4 million per annum for the purposes of the valuation. An allowance of $35-45 million has been made in the valuation for the capitalisation of the residual corporate costs.
61
5.8 Net Cash
Aquila’s net cash as at 31 December 2013 was $494.1 million, which is based on cash of $505.4 million and a finance lease liability of $11.3 million. 5.9 Options and Rights
As at 30 April 2014, Aquila had 1,870,000 options on issue, which, if exercised, would convert to 2,156,550 ordinary shares. The company also has 363,987 performance share rights and 1,219,147 share appreciation rights on issue. Grant Samuel has valued these securities in the range $3-4 million.
For personal use only use personal For
62
6 Evaluation of the Offer
6.1 Conclusion
In Grant Samuel’s opinion the Offer is not fair. However, in Grant Samuel’s view the Offer is reasonable.
Grant Samuel has valued Aquila in the range $3.90-5.24 per share. The Offer Price of $3.40 per share falls below the bottom end of the valuation range. Accordingly, the Offer is not fair.
Assessment of the Offer is not straightforward. While Aquila’s Eagle Downs coal project is in the early stages of construction, Aquila’s other resources assets are all pre-development or exploration interests. Such assets are by their very nature difficult to value. In particular, while West Pilbara is a very large and potentially extremely valuable iron ore project, it will require initial capital expenditure of the order of $7.5-8.0 billion and generate returns over a very long period. The funding and development challenges for a company like Aquila are such that it is likely that the share market has been attributing little or no value to Aquila’s West Pilbara interest. The structure of Aquila’s share register, with more than 70% of the shares held by the top four shareholders, means that Aquila shares are relatively illiquid. It is to be expected that the pre-bid price of Aquila shares would have been a poor indicator of the underlying value of Aquila’s assets.
The Offer from Baosteel and Aurizon is focussed on ownership and development of West Pilbara and demonstrates the view of the Bidders that West Pilbara can be successfully developed. Grant Samuel’s valuation of Aquila’s interest in West Pilbara, while taking into account the uncertainties and risks that apply to the project, reflects a fundamental assumption that the project can be advanced to development within a reasonable timeframe.
On the basis of Grant Samuel’s estimate of underlying value, the Offer is not fair. The more important question for Aquila shareholders is whether they would be better off accepting the Offer, notwithstanding that it is not fair.
The Bidders have announced that they will not increase the Offer Price. As a result of the “truth in takeovers” principle this is effectively a legally binding commitment.
Aquila shares were trading at levels well below the Offer Price immediately before the Offer was announced. The Offer Price represents a significant premium.
Without the involvement of a major industry participant with substantial funding capacity, Aquila does not have a clear path forward to the financing and development of West Pilbara and does not have the financial and other resources to concurrently progress its other pre-development assets. In this context, given current market conditions, it is to be expected that the share market will not attribute meaningful value to Aquila’s pre-development assets.
Accordingly, in the absence of the Offer or the expectation of some similar transaction, Grant Samuel expects that Aquila shares would trade at prices well below the Offer price. The Aquila share price fell sharply when the Bidders announced that they would not increase the Offer Price. The risk of a further fall in the share price in the absence of the Offer is exacerbated by the recent weakness in the iron ore market, with the benchmark iron ore price having fallen by around 15% since the announcement of the Offer.
For personal use only use personal For Mr Tony Poli, Aquila’s executive chairman, has flagged his intention to accept the Offer in respect of his 28.92% shareholding (in the absence of a superior proposal). Together with Baosteel’s existing shareholding, this would give Baosteel a shareholding of almost 49% of Aquila and effective control.
63
These factors suggest that shareholders would be better off accepting the Offer, unless they are willing to take a long term view on the upside from the development of West Pilbara and accept the associated risks.
In any event, there are good reasons for shareholders to delay as long as possible their acceptances of the Offer, to provide the maximum opportunity for any alternatives proposals to be put forward.
Baosteel’s 19.8% interest in Aquila does not of itself rule out a counter-bidder. However, there are realistically only a limited number of parties with the industry experience, financial capacity and motivation to make a credible counter-proposal. MRL made an indicative proposal for an all- scrip acquisition of Aquila, but MRL and Aquila were unable to agree on terms and discussions lapsed. MRL acquired its 12.78% interest in Aquila at prices around $3.75 per share and any further proposal that it might make would have to be at least at that price. The key challenge for any further proposal from MRL would be to demonstrate a clear path to the funding of the development of West Pilbara. While a counter-offer (from MRL or some third party) remains possible, the prospects of such a counter-offer appear remote.
On balance, in Grant Samuel’s view, in the absence of a superior alternative proposal, shareholders are likely to be better off if they accept the Offer. On this basis, in Grant Samuel’s opinion, the Offer is reasonable.
6.2 Fairness
Grant Samuel has valued Aquila in the range $3.90-5.24 per share. The Offer Price of $3.40 per share falls below the bottom end of the valuation range. Accordingly, the Offer is not fair.
6.3 Reasonableness
6.3.1 Overview
An offer can be reasonable, even if it is not fair, if there are compelling reasons for shareholders to accept the offer. For example, an offer from a controlling shareholder could be reasonable, even if not fair, if the offer was at a premium to the pre-bid share price and there was little or no prospect of a higher bid given the position of the controlling shareholding.
In the case of the Offer from Baosteel and Aurizon, the question for Aquila shareholders is whether they would have a realistic prospect of realising more value than the current Offer Price of $3.40 per share if they did not accept the Offer.
6.3.2 Premium for Control
The Offer Price of $3.40 represents a 39% premium to the price at which Aquila shares last traded prior to the announcement of the Proposal. It is also a material premium to the price at which Aquila shares have traded over the last twelve months:
For personal use only use personal For
64
Aquila – Premium over Pre-announcement Prices Period Share Price ($) Premium 2 May 2014 – Pre-announcement price 2.45 39% 2 May 2014 – VWAP27 2.44 40% 1 week to 4 May 2014 – VWAP 2.46 38% 1 month prior to 4 May 2014 – VWAP 2.61 30% 3 months prior to 4 May 2014 - VWAP 2.57 32% 6 months prior to 4 May 2014 - VWAP 2.34 45% 12 months prior to 4 May 2014 – VWAP 2.33 53%
Aquila’s share price relative to the Offer Price is shown in the chart below:
Aquila - Share Price and Trading Volume (18 June 2013 - 17 June 2014)
$4.00 Offer price: $3.40 $3.50
$3.00
$2.50
Price $2.00
$1.50
$1.00
$0.50
$0.00
Source: IRESS
The level of premiums observed in takeovers varies depending on the circumstances of the target and other factors (such as the potential for competing offers, synergies available to bidders and the strategic importance to the bidders of the target) but tend to fall in the range 20-35%. The premium represented by the Offer Price relative to recent Aquila share prices is relatively high compared to those normally seen in takeover offers.
In Grant Samuel’s view, it is credible that Aquila shares have been trading at prices well below underlying value. The structure of Aquila’s share register means that there is a modest free float and limited share liquidity. Moreover, the pre-development stage of most of Aquila’s assets means that the company is of limited appeal to share market investors focussed on yield and short term earnings. These factors could be expected to result in trading in Aquila shares at prices well below underlying value. In this context, the extent of the premium may be less relevant to the assessment of the Offer.
For personal use only use personal For 6.3.3 Share Trading in the absence of the Offer
A key issue for shareholders in assessing whether to accept or reject the Offer is the price at which Aquila shares could be expected to trade in the absence of the Offer. In this regard:
27 VWAP is volume weighted average price.
65
. Aquila shares were trading at well below the Offer Price before the announcement of the Offer;
. the nature of Aquila’s asset base, with first production from Eagle Downs not expected before 2017 and potentially longer development timetables for its other assets, is not attractive to a share market that is focussed on earnings and yield;
. given the structure of Aquila’s register, with only around 25% of the shares on issue available as free float, trading in Aquila shares is relatively illiquid, which would also tend to depress the market price; and
. the iron ore benchmark price has fallen by around 15% since the announcement of the Offer.
On the other hand:
. the Offer and the information released in Aquila’s response to the Offer may result in a market re-assessment of the value of Aquila’s assets;
. in particular, the Offer represents an endorsement by well-credentialed participants in the iron/steel and transport industries of the West Pilbara iron ore project; and
. MRL’s acquisition of a 12.78 % shareholding in Aquila at prices around $3.75 arguably suggests that MRL, a relatively sophisticated participant in the iron ore sector, sees value in Aquila shares at prices above the Offer Price. However, it may be the case that the acquisition of its Aquila shareholding reflected MRL’s expectation that the shareholding could assist in negotiating a position in the construction and ownership of the West Pilbara project, rather than a view on the value of Aquila.
Aquila’s share price fell sharply when the Bidders announced that they would not increase the Offer Price. The recent fall in the iron ore price could be expected to put additional pressure on the Aquila share price, in the absence of the Offer. Overall, in Grant Samuel’s view, in the absence of the Offer or expectations of a similar proposal, Aquila shares are likely (at least in the short term) to trade at prices well below the Offer Price. Aquila shareholders would be unlikely to realise the value delivered by the Offer (assuming the continuation of current market conditions) through selling their Aquila shares in the ordinary course of share market trading
6.3.4 Alternatives
In weighing up the Offer, shareholders need to have regard to the alternatives that are realistically available to them.
The Bidders have publicly announced that they will not increase the Offer Price. Because of the “truth in takeovers” principle, this is a binding commitment: the Bidders are effectively legally prevented from increasing the Offer Price. It would theoretically be open to the Bidders to allow the current Offer to lapse and then, after a suitable interval, to make a new offer at a higher price. However, for the purposes of assessing the Offer it is appropriate to completely discount this possibility.
For personal use only use personal For Baosteel’s existing 19.8% shareholding is not an absolute impediment to an alternative proposal from a third party. Given the shareholdings of Mr Tony Poli and Mr Charles Bass, who jointly hold around 40% of Aquila’s shares on issue, it would be possible for a third party to acquire control of Aquila notwithstanding Baosteel’s shareholding. However, there are realistically only a limited number of parties with the financial capacity, industry experience and motivation to make a credible counter-offer. MRL made an indicative proposal to acquire Aquila by way of an all-scrip takeover offer with a nominal value equal to $3.75 per share. Aquila and MRL were unable to agree on terms and discussions lapsed.
66
Because MRL acquired its 12.78% interest in Aquila at around $3.75 per share, any follow on proposal from MRL would have to be at least at that price. However, a key issue in relation to any proposal from MRL would relate to its ability to demonstrate a clear path to the financing of the development of West Pilbara. While a counter-offer (from MRL or some third party) remains possible, the prospects of such a counter-offer appear remote.
6.3.5 Conclusion
In the absence of the Offer or expectations of a similar proposal, Aquila shares are likely to trade at well below the Offer Price. There is no realistic prospect of a higher offer from the Bidders. While a superior proposal from some third party (potentially MRL) cannot be absolutely ruled out, there can be no certainty that such a proposal will be forthcoming. In particular, any such proposal would need to provide a high degree of confidence in relation to the funding of the development of West Pilbara.
Aquila’s executive chairman, Mr Tony Poli, has announced that he intends to accept the Offer in relation to his 28.92% shareholding (in the absence of a superior proposal and subject to has reserving his right to revisit this). Mr Poli’s acceptance of the Offer would give the Bidders a shareholding of close to 49% and effective control of Aquila, and almost certainly guarantee that the 50% minimum acceptance condition would be fulfilled.
Shareholders with no requirement for short term liquidity and a positive view on the West Pilbara project and the iron ore market could choose to reject the Offer in the expectation that development of West Pilbara could deliver greater value in the medium to longer term. In Grant Samuel’s opinion, however, such a course of action would expose shareholders to significant risks. Pending the resolution of the Offer, there could be no certainty as to whether and when West Pilbara would be developed. If the Offer was successful but the Bidders failed to acquire sufficient shares to be entitled to compulsorily acquire all outstanding shares, non-accepting shareholders would find themselves as minority shareholders in a company with potentially very limited share liquidity. In those circumstances (given current market conditions) there would be a risk that Aquila shares would trade at prices materially lower than the Offer Price.
Having regard to these factors, in Grant Samuel’s view shareholders are likely to be better off accepting the Offer, in the absence of a superior offer. Shareholders who intend to accept the Offer should consider delaying their acceptances as long as possible, both to provide the maximum opportunity for any counter-proposal to be put forward and to provide greater clarity on the conditionality of the Offer.
In this regard, in considering the Offer, Aquila shareholders should also have regard to its conditionality. Aquila’s three largest shareholders (other than Baosteel) jointly hold around 52% of Aquila’s shares on issue. These three shareholders are Mr Tony Poli, Aquila’s executive chairman, Mr Charles Bass, Aquila co-founder, and MRL. Unless one of these shareholders accepts the Offer or the Bidders waive the Offer’s current 50% minimum acceptance condition, the Offer cannot become unconditional and so even if shareholders accept the Offer they will not receive the cash consideration.
Overall, in Grant Samuel’s view, because shareholders are likely to be better off accepting the Offer, the Offer is reasonable (in the absence of a superior proposal). Accordingly, the Offer is not fair but reasonable.
For personal use only use personal For 6.4 Shareholder Decision
Grant Samuel has been engaged to prepare an independent expert’s report setting out whether in its opinion the Offer is fair and reasonable to Aquila shareholders and to state reasons for that opinion. Grant Samuel has not been engaged to provide a recommendation to shareholders in relation to the Offer. The responsibility for such a recommendation lies with the directors of Aquila.
67
In any event, the decision whether to accept or reject the Offer is a matter for individual shareholders based on each shareholder’s views as to value, their expectations about future market conditions and their particular circumstances including risk profile, liquidity preference, investment strategy, portfolio structure and tax position. In particular, taxation consequences may vary from shareholder to shareholder. If in any doubt as to the action they should take in relation to the Offer, shareholders should consult their own professional adviser.
Similarly, it is a matter for individual shareholders as to whether to buy, hold or sell shares in Aquila. This is an investment decision upon which Grant Samuel does not offer an opinion and is independent of a decision on whether to accept the Offer. Shareholders should consult their own professional adviser in this regard.
For personal use only use personal For
68
7 Qualifications, Declarations and Consents
7.1 Qualifications
The Grant Samuel group of companies provide corporate advisory services (in relation to mergers and acquisitions, capital raisings, debt raisings, corporate restructurings and financial matters generally) and provides marketing and distribution services to fund managers. The primary activity of Grant Samuel & Associates Pty Limited is the preparation of corporate and business valuations and the provision of independent advice and expert’s reports in connection with mergers and acquisitions, takeovers and capital reconstructions. Since inception in 1988, Grant Samuel and its related companies have prepared more than 500 public independent expert and appraisal reports.
The persons responsible for preparing this report on behalf of Grant Samuel are Stephen Cooper BCom (Hons) ACA and Ross Grant BSc (Hons) MCom (Hons) MBA. Each has a significant number of years of experience in relevant corporate advisory matters. Atagun Bensan BSc(Hons) LLB, Jaye Gardner BCom LLB (Hons) CA SF Fin, Matt Leroux MEng MBA, Sophie Whitlam B Com/B Sci and Shakeel Mohammed MS MBA assisted in the preparation of the report. Each of the above persons is a representative of Grant Samuel pursuant to its Australian Financial Services Licence under Part 7.6 of the Corporations Act.
7.2 Disclaimers
It is not intended that this report should be used or relied upon for any purpose other than as an expression of Grant Samuel’s opinion as to whether the Offer is fair and reasonable to shareholders. Grant Samuel expressly disclaims any liability to any Aquila shareholder who relies or purports to rely on the report for any other purpose and to any other party who relies or purports to rely on the report for any purpose whatsoever.
Grant Samuel has had no involvement in the preparation of the Target’s Statement issued by Aquila and has not verified or approved any of the contents of the Target’s Statement. Grant Samuel does not accept any responsibility for the contents of the Target’s Statement (except for this report).
7.3 Independence
Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any business or professional relationship with Aquila, Baosteel or Aurizon or any financial or other interest that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Offer.
Grant Samuel will receive a fixed fee of $500,000 for the preparation of this report. This fee is not contingent on the conclusions reached or the outcome of the Offer. Certain of Grant Samuel’s out of pocket expenses in relation to the preparation of the report will be reimbursed. Grant Samuel will receive no other benefit for the preparation of this report.
Grant Samuel considers itself to be independent in terms of Regulatory Guide 112 issued by ASIC on 30 March 2011.
7.4 Declarations For personal use only use personal For Aquila has agreed that it will indemnify Grant Samuel and its employees and officers in respect of any liability suffered or incurred as a result of or in connection with the preparation of the report. This indemnity will not apply in respect of the proportion of any liability found by a court to be primarily caused by any conduct involving gross negligence or wilful misconduct by Grant Samuel. Aquila has also agreed to indemnify Grant Samuel and its employees and officers for time spent and reasonable legal costs and expenses incurred in relation to any inquiry or proceeding initiated by any person. Any claims by Aquila are limited to an amount equal to the
69
fees paid to Grant Samuel. Where Grant Samuel or its employees and officers are found to have been grossly negligent or engaged in wilful misconduct Grant Samuel shall bear the proportion of such costs caused by its action.
Advance drafts of the factual sections of this report were provided to Aquila and its advisers. Certain changes were made to the drafting of the report as a result of the circulation of the drafts. There was no alteration to the methodology, valuation or basis of evaluation as a result of the issuing of these drafts. On 8 June 2014, Grant Samuel provided a draft of the full independent expert’s report. The draft of the full independent expert’s report set out Grant Samuel’s opinion that the Offer was neither fair nor reasonable. On 13 June 2014, the Bidders announced that they would not increase the Offer Price. Having regard to these new circumstances, Grant Samuel re- assessed the Offer. On 17 June 2014 Grant Samuel provided a further draft of its full expert’s report setting out Grant Samuel’s revised opinion that the Offer is not fair but reasonable, and the reasons for that opinion. There was no change to Grant Samuel’s assessment of the value of Aquila. On 18 June 2014 Aquila made certain further announcements, including in relation to an takeover proposal from MRL and the qualified intentions of Mr Tony Poli to accept the Offer (in the absence of a superior proposal). Grant Samuel made further changes to its report to reflect these issues, but there was no change to its valuation of Aquila, evaluation and opinion in relation to the Offer.
7.5 Consents
Grant Samuel consents to the issuing of this report in the form and context in which it is to be included in the Target’s Statement to be sent to shareholders of Aquila. Neither the whole nor any part of this report nor any reference thereto may be included in any other document without the prior written consent of Grant Samuel as to the form and context in which it appears.
7.6 Other
The accompanying letter dated 20 June 2014 and the Appendices form part of this report.
Grant Samuel has prepared a Financial Services Guide as required by the Corporations Act. The Financial Services Guide is set out at the beginning of this report.
GRANT SAMUEL & ASSOCIATES PTY LIMITED 20 June 2014
For personal use only use personal For
70
Appendix 1
Overview of the Coking Coal, Iron Ore and Manganese Markets
1 Coal
1.1 Australian Coal Industry
Coal is one of Australia’s most abundant natural resources and its second largest export commodity (after iron ore), accounting for $38.6 billion, or around 16%, of Australia’s total commodity exports in the year ended 30 June 2013. The vast majority of Australia’s accessible coal resources are located in Queensland and New South Wales. Most of the coal in Australia is coking coal and thermal coal. Coking coal (also called metallurgical coal) is used in the manufacturing processes for iron and steel. Thermal coal (also called steaming coal) is used for power generation. This group of coals is known as ‘hard’ or ‘black’ coal. The coking and thermal coal markets operate on a relatively independent basis, although some product substitution occurs between markets. Product substitution is generally confined to the lower quality coking coals and the higher quality thermal coals.
In the year ended 30 June 2013, the Australian coal industry produced 154 million tonnes (Mt) of coking coal and 239 Mt of thermal coal. On a global scale, Australia is the fifth largest coal producer, ranking behind China, the United States, India and Indonesia (although it is the second largest producer of coking coal after China). However, unlike most of these countries, Australia exports the majority of its coal production and in 2013 was the world’s second largest coal exporter (after Indonesia), exporting approximately 336 Mt of coal (85% of total production).
Over the last decade, coal has been one of the fastest growing fuel sources in terms of consumption. Global coal consumption has increased by 45% since 2003, while over the same period the consumption of oil, gas and nuclear energy combined grew by 15%. A number of factors have contributed to this ongoing growth, although the most significant has been the industrialisation of China, which led to substantial consumption of both coking and thermal coal, and has been the single largest driver of demand for coal globally. China currently consumes around half of the world’s coal supply and, although it is also the world’s largest coal producer, its domestic demand requirements have exceeded its production since 2009.
China’s coal trade position is expected to continue to be a key demand driver for global coal markets. Given China’s sizeable coal production and consumption capacity, a swing in its coal trade balance (in either direction) could impact global coal markets significantly.
As Aquila Resources’ coal is primarily coking coal, the balance of this overview of the Australian coal industry focuses on coking coal.
1.2 Global Trade in Coking Coal
The coking coal market is divided into three main market segments – hard coking coal, semi-soft coking coal and PCI. Hard coking coal produces the highest quality coke and commands the highest price of the three product types. Semi-soft coking coal exhibits some but not all coking properties. Semi-soft coking coal is used either to blend with hard coking coal or in the PCI process where it provides an auxiliary fuel source to increase the effectiveness of blast furnaces.
For personal use only use personal For The use of PCI in the steel industry has had a substantial impact on coking coal markets as it has enabled blast furnace operators to increasingly substitute PCI for more expensive hard coking and semi-soft coking coals and lower production costs significantly. This trend is expected to continue as blast furnace technology improves.
Demand for coking coal is primarily determined by world blast furnace steel production levels and has increased by approximately 7% per annum over the last five years (although this was largely due to double digit growth in 2010 with growth in subsequent years being more subdued at around
1
4% per annum). The steel industries in the United States, Europe, Eastern Europe and Japan are relatively mature, with changes is demand driven mainly by economic cycles (e.g. steel consumption declined in Europe in 2013). In contrast, China and India have developing steel industries and their demand for coking coal has trended steadily upwards.
A summary of world coking coal imports and exports since 2009 is set out below:
World Coking Coal Imports and Exports (Mt) 2009 2010 2011 2012 2013 Imports China 34 48 38 52 93 Japan 53 58 54 53 54 Europe 36 45 47 42 40 India 25 30 19 16 37 South Korea 21 28 32 33 33 Brazil 9 12 12 13 13 Other 42 52 51 63 44 Total imports 220 273 253 272 314 Exports Australia 135 159 133 144 170 United States 34 51 63 63 59 Canada 22 28 28 30 34 Russia 13 14 14 17 15 Other 16 21 15 18 36 Total exports 220 273 253 272 314 Source: BREE
In 2013, Asia accounted for almost 70% of total coking coal imports. China is the single largest importer (having overtaken Japan in 2013) and was responsible for 30% of total coking coal imports in 2013.
Australia is the world’s largest exporter of coking coal, exporting a total of 170 Mt of coking coal in 2013. Ocean freight rates represent a significant proportion of the delivered cost of coal to overseas markets and are an important factor in determining the relative competitiveness of international coal suppliers. Australia’s proximity to the Asian markets provides it with a competitive advantage. Almost 70% of coking coal exported from Australia in 2013 was to countries in Asia, with Japan accounting for 25% of coking coal exports. Other significant export destinations for Australian coking coal producers are India, China and South Korea.
The United States and Canada are the second and third largest exporters of coking coal. The United States exported a total of 59 Mt of coking coal in 2013, while Canada exported 34 Mt. The majority of the United States’ export coking coal is shipped to Europe, mainly from its east coast and the Gulf of Mexico. Historically, Canada has exported coking coal primarily to Japan and Korea (given the relative proximity to Asia of Canada’s coal producing regions along its west coast), but in recent years Europe has become its largest export destination.
An important factor in coking coal markets is the relative supply of the different coal types. High quality hard coking coal is less plentiful which, combined with its characteristics, underpins its
For personal use only use personal For demand and price premium. In contrast, lower quality coking coals and PCI coals are more plentiful with a number of new global suppliers emerging over the past decade. Accordingly, each product type faces different supply/demand dynamics.
The outlook for world coking coal primarily depends on future growth in steel production, which is expected to be moderate over the medium term. China represents an ongoing supply-demand wild card, particularly for Asia-Pacific producers. Over the medium term:
2
. while demand for coking coal is not expected to increase at recent historically high rates as China’s economy matures and growth in steel production slows, imports are expected to make up a larger share of future Chinese coal consumption (as lower cost and higher quality product displaces local production). The Chinese government has also put a coking coal reservation policy in place that encourages the use of imports to increase the life of domestic reserves; and
. expected growth in steel production in other developing countries such as India and Brazil (albeit off relatively low levels of imports currently) is expected to outstrip the rate of new supply entering the global coking coal market (although this growth in demand is not expected to replicate the surge in demand from the industrialisation and urbanisation of China over the past decade).
1.3 Coking Coal Prices
The majority of coal traded in international markets is bought and sold pursuant to term contract arrangements. Term contract arrangements typically specify factors such as term, volumes, cargo size, quality specifications, delivery arrangements and price between the supplier and purchaser. There is also a spot market for coking coal. Generally, lower quality coals are traded on the spot market.
In Japan and other Asian markets coal sales are normally negotiated under medium term contracts. These contracts can also be on an “evergreen” basis for periods of one to five years. Under term contracts coal sales volumes are usually set at a contract level with provision for the purchaser to marginally increase or decrease contract volumes depending on demand. Historically, prices have been renegotiated annually (normally between December and March, prior to commencement of the Japanese fiscal year on 1 April). However, since 2010 many coking coal producers have moved to quarterly pricing in line with contracts signed by iron ore companies.
Price negotiations for coal tend to be done on a “benchmark” basis, with a handful of major producers and buyers negotiating to establish annual benchmark prices. Subsequent coal price contracts tend to settle with reference to those benchmark prices, generally adjusted for specific coking or energy characteristics of the coal.
Given Japan’s dominant market position in Asia the prices established in the annual Japanese negotiations typically provide the benchmark for pricing arrangements for other Asian markets. There has been some attempt to reduce this influence and set prices in other markets more independently. While there is some evidence of contracts into other regions being priced independently (typically for niche or specialised coal types) the Japanese price negotiations remain the pricing reference point for the majority of coal contracts.
European contracts are usually settled on a calendar year basis. The European market is more fragmented than the Asian market and tends to display characteristics of a more competitive marketplace with a larger number of buyers and sellers.
Australian export coal is generally priced in US$. Consequently, changes in the A$/US$ exchange rate can significantly impact the A$ price received by Australian coal producers. Short term movements in the A$/US$ exchange rate can result in short term windfall gains or windfall losses for Australian exporters depending on the direction of the movement in the exchange rate. Many coal producers hedge the foreign currency exposure of their coal sales in order to reduce this For personal use only use personal For volatility.
Japanese benchmark coal prices for term contracts between Japanese purchasers and Australian suppliers in US$ and A$ equivalent since 2008 are illustrated in the following chart:
3
Australian Hard Coking Coal Prices to Japan (January 2008 - June 2014) $450
$400
$350
$300
$250
$200
Price ($/t FOB) $150
$100
$50
$0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
US$/t FOB A$/t FOB Source: AME Group, IRESS
Hard coking coal contract prices peaked in January 2011 following a shortage of supply due to the floods in Queensland. Since that time, hard coking coal prices have been on a downward trend and are currently at six year lows (based on the US$120 per tonne contract price settled between Anglo American and Nippon Steel and Sumitomo Metals for the June 2014 quarter). The decline in the hard coking coal price has been due to a substantial increase in supply. While the historically low prices have forced some producers worldwide to cut costs1 and production and to close down or suspend production at facilities (e.g. Glencore-Xstrata’s Ravensworth underground mine in New South Wales which will be put on “care and maintenance” from September 2014), other producers have increased production:
. to improve productivity and amortise fixed costs over a larger production volume; and/or . to meet take or pay contracts on rail and port capacity (e.g. BHP Billiton, Anglo American).
A number of producers committed to expansions when hard coking coal prices were higher, and these committed expansions have increased or will continue to increase the supply of hard coking coal in the medium term (e.g. BHP-Mitsubishi Alliance’s 5.5 Mtpa Caval Ridge hard coking coal mine which commenced production in April 2014, Eagle Downs, Rio Tinto’s Kestral Mine Extension and BHP Billiton’s $845 million investment in Appin Area 9 in New South Wales which is on track for completion in 2016).
While oversupply is expected to continue to put pressure on hard coking coal prices in the short term, over the medium and longer term prices are expected to trend upwards, as demand from emerging economies, particularly in Asia, outstrips the increase in supply and the closure of higher cost mines reduces the world supply of hard coking coal.
For personal use only use personal For
1 For example, Glencore-Xstrata has started cutting back coking coal production in Australia and there have also been cuts to United States production, BHP Billiton has announced it will reduce its Illawarra Coal workforce by 36 persons and Peabody has announced it is reviewing its coking coal operations and initiating a new round of cost cutting measures in light of continuing low prices.
4
2 Iron Ore Market
2.1 Overview
Iron is one of the most abundant rock-forming elements, constituting about 5% of the Earth's crust. Iron ores are rocks from which metallic iron can be economically extracted, and are most often found in the form of hematite and magnetite, though goethite, limonite, itabirite, pisolite and siderite are also common. Approximately 98% of global iron ore production is used to make steel and demand for iron ore is therefore underpinned by growth in steel production. Steel is widely used in construction, infrastructure, machinery, automobiles, home appliances and a range of other industries and demand for steel is therefore primarily driven by global economic conditions.
High grade hematite ore (>56% Fe), also referred to as direct shipping ore, has traditionally accounted for the majority of the iron ore mined globally as it requires a relatively simple crushing and screening process before being exported for use in steel mills. Depletion of high grade material globally combined with increased demand for iron ore has resulted in mining of lower grade hematite and magnetite deposits (<40% Fe). However low grade deposits (<40% Fe) typically require beneficiation to improve the grade and quality of the product, which increases production costs.
Iron ore is a fairly homogeneous product with limited substitutes. However, it is a relatively low value-to-weight ratio product which necessitates bulk mining and therefore substantial investment in mining and infrastructure.
Iron ore is produced by a range of independent producers and fully integrated steel makers. Most of the iron ore that is exported and traded internationally is produced by independent iron ore producers and sold to large international steel makers. The top three iron ore exporters in the world account for approximately 65% of globally traded iron ore.
2.2 Australian Iron Ore Industry
Iron ore is Australia’s largest export commodity and accounted for $57.1 billion or 23.7% of exports by value during FY2013. Australia produced about 554 million tonnes of iron ore during this period, and exported 528 million tonnes, 95% of the ore produced. Over 94% of Australia’s iron ore exports were sourced from the Pilbara region in north-west Western Australia and the top four producers namely, Rio Tinto, BHP Billiton, Fortescue Metals Group and Hancock Prospecting accounted for over 91% of the ore produced.
Australia’s iron ore production has more than tripled since 2000, increasing at a cumulative average growth rate (“CAGR”) of approximately 10% between 2000 and 2012. Production is forecast to continue increasing due to expanding production from the major iron ore producers and is expected to reach around 800 million tonnes by 2017.
Australia is the world’s largest iron ore exporter and accounted for 46% of global export volumes during 2012. This was significantly higher than its 34% contribution in 2000, and underlines Australia’s growing importance to world iron ore trade. Approximately 75% of Australia’s iron ore exports during 2012 were to China with Japan (15%) and Korea (9%) being the other major customers. Australia also has the world’s largest share of Economic Demonstrated Resources (“EDR”) with 44.6 billion tonnes representing 25% of the world’s EDR of iron ore in 20122. Iron ore resources in Australia are mainly found in the form of Brockman ore, Pisolitic ore, Marra
For personal use only use personal For Mamba ore and magnetites. The chemical properties of these ores are outlined in the following table:
2 Geoscience Australia
5
Australia Iron Ore Types – Typical Specifications Product Type Ore Specifications Deposits
Premium Brockman 65% Fe, 0.05% P, 4.3% SiO2, and 1.7% Al2O3 Mount Whaleback and Mount Tom Price
Brockman 62.7% Fe, 0.10% P, 3.4% SiO2, 2.4% Al2O3 Channar, Paraburdoo, and Jimblebar and 4.0% LOI
Marra Mamba 62% Fe, 0.06% P, 3% SiO2, 1.5% Al2O3, and Nammuldi, West Angelas, Mining 5% LOI Area C, Marandoo, Hope Downs, Cloud Break and Christmas Creek
Channel Iron Deposit 58% Fe, 0.05% P, 4.8% SiO2, 1.4% Al2O3 and Robe River and Yandicoogina (CID) / Pisolites 10% LOI
63.8% Fe, 0.017% P, 6.13% SiO2, 1.01% Koolan Island Al2O3 and 0.46% LOI Other Hematite 57.4% Fe, 0.09% P, 7.07% SiO2, 2.4% Al2O3 Pardoo and 4.0% LOI Magnetite (after beneficiation) 66.3% Fe, 0.02% P, 1.9% Balmoral, Cape Lambert, Karara and SiO2, 0.4% Al2O3 and 1.0% LOI Savage River Source: Geoscience Australia Note: LOI means loss on ignition
Aquila’s West Pilbara resource is a typical CID/pisolitic ore type.
2.3 Global Trade in Iron Ore
World steel production has increased from around 850 million tonnes in 2000 to around 1,545 million tonnes in 20123. China is the world’s largest steel producer and accounted for approximately 46% of global steel production in 2012. China’s steel production increased more than fivefold between 2000 and 2012 as its economy industrialised and urbanised. Steel production in the rest of the world however increased by a relatively modest 11.5% over the same period. This wide disparity in growth rates underlines China’s overwhelming impact over the last decade on the demand for iron ore and coal, the primary raw materials used in steel production.
Global trade in iron ore is primarily through the seaborne market. Global iron ore trading volumes more than doubled between 2000 and 2012, with China being the primary driver of the growth in seaborne traded iron ore. China is currently the world’s largest iron ore importer accounting for approximately 65% of the global iron ore trade. Accordingly, even minor fluctuations in China’s demand are likely to have a significant impact on the global demand/supply balance. China’s demand for iron ore is forecast to continue to grow in the near to medium term, albeit at lower than historical rates, underpinned by continued growth steel production4.
The rapid increase in Chinese iron ore demand since 2000 significantly outpaced growth in supply, resulting in substantial increase in global iron ore prices. This encouraged sizeable investment in new projects and associated infrastructure, particularly by the large iron ore producers in Australia and Brazil. Consequently, iron ore production from Australia and Brazil has increased considerably over the last few years and is expected to expand further as a number of major projects are expected to commence production within the next few years.
For personal use only use personal For
3 World Steel Association 4 Industry experts and commentators are projecting steel production in China to grow at around CAGR 3.5% and global steel production to grow at around CAGR 3.3% between 2015-2020
6
A summary of world iron ore imports and exports between 2008 and 2012 is set out below:
World Iron Ore Imports and Exports (Mt) 2008 2009 2010 2011 2012 Imports China 460 640 638 707 766 Japan 140 105 134 128 131 Europe 186 114 156 151 146 South Korea 50 42 55 65 65 Americas 31 13 28 23 24 Other 37 26 39 36 40 Total imports 904 941 1,050 1,111 1,172 Exports Australia 309 363 402 438 492 Brazil 274 266 311 331 327 South Africa 33 45 48 42 47 Canada 28 31 33 31 35 India 106 117 96 50 29 Other 139 133 166 168 151 Total exports 889 955 1,055 1,060 1,080 Source: BREE
Australia and Brazil are the world’s largest exporters of iron ore and together accounted for approximately 76% of global exports during 2012. China is also a substantial producer with annual production estimated in the 300-350 million tonnes range, but all of its production is consumed domestically. The majority of China’s iron ore production is reportedly sourced from very low grade ore and has a high production cost.
Growth in iron ore supply is forecast to exceed demand growth over the near to medium term, which is likely to have a dampening effect on iron ore prices. Seaborne trade in iron ore is still forecast to grow, however, as high cost domestic production in China is displaced by lower cost imported iron ore.
2.4 Iron Ore Prices
There are four core iron ore products sold internationally: lump ore, pellets, sinter fines and concentrates.
Lump ore is a high grade, hard ore, between 6-32 mm in diameter, which is used as direct feed for steel plants.
Pellets are a high grade premium iron product. Pellets are made from very fine or powdery fines ore, which are agglomerated into small balls of around 0.15 mm diameter by first grinding and heating in a furnace with a binder material. Other compounds, such as silica (acid pellets) and flux (flux pellets) are added during processing to tailor pellets to individual customer specifications. Pellets are ideal feed for steel plants because they are hard and of regular size and shape.
For personal use only use personal For Sinter fines are a powdery form of iron ore and tend to be of lower grade but often have lower quantities of impurities. Sintering is a heating process using coke fuel to agglomerate iron fines in preparation for blast furnace smelting. Sintering normally takes place at steel plants where coke and other materials are more freely available. Sinter fines are the most commonly traded product, accounting for approximately 70% of global iron ore imports.
Concentrate is a beneficiated form of very low grade fines ore. Concentrate is produced through grinding and various processes of clarification, separation and floatation to recover contained iron
7
and remove waste products such as gangue. Concentrate is generally sold as sinter feed along with fines.
The iron content in the ore is the primary factor in determining the value of the ore although other chemical, physical and metallurgical properties of the ore, which impact the performance of the furnace and the quality of the products, are also considered. The most common impurities or contaminants in the ore are silicon dioxide, phosphorous, aluminium oxide and sulphur. Steel mills have varying levels of tolerance to impurities and generally there is a negotiated adjustment to the iron ore price to reflect impurity levels. These adjustments can have a material impact on the commercial viability of ore resources.
For more than two decades until the end of 2009, the majority of iron ore traded in international markets was bought and sold pursuant to term contract arrangements and only a small quantity was settled on spot basis. The contract typically specified factors such as term, volumes, cargo size, quality specifications and delivery arrangements and included provision for the purchaser to marginally increase or decrease contract volumes depending on demand. Pricing was generally based on annually negotiated benchmark price, normally negotiated before the start of the Japanese Financial Year (“JPY”) on 1st April and the first agreed price between a global steel mill and a major iron producer established the benchmark price for the other participants for the remainder of the JPY.
The annually negotiated contracts did not reflect market conditions in a timely manner and this became apparent during the GFC when the spot iron ore price declined rapidly, creating a wide disparity between spot iron ore prices and contracted prices. This encouraged some of the Chinese steel mills to default on their commitments and switch to cheaper spot purchases. As a consequence, the pricing negotiations saw a move away from the traditional system to shorter term contracts. In the first quarter of 2010 BHP Billiton announced a new quarterly pricing mechanism based on average spot prices. The new quarterly pricing mechanism was soon adopted by other iron producers and currently most of the iron ore traded globally is settled on this basis. Historical iron ore prices in US$ and A$ terms are illustrated below:
China Import Iron Ore Fines spot - 62% Fe (Tianjin Port) (November 2008 - June 2014)
$250
$200
$150 Price $100
$50
$0
Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 For personal use only use personal For US$/dmt (CFR) A$/dmt (CFR)
Source: Bloomberg
Grant Samuel’s long term price assumption of US$90-100/dmt CFR for iron ore is broadly consistent with the range of price forecast of a number of market analysts. The long term prices assumed are broadly consistent with the spot prices prevailing in late May and early June 2014.
8
With a number of major iron ore projects having recently commenced production, or expected to commence production within the next 1-3 years, the iron ore market is expected to be oversupplied over the near to medium term. However the high cost of production of marginal producers in China is expected to be supportive of long term prices.
3 Manganese
3.1 Overview
Manganese is a hard, brittle silver-grey transition metal that reacts with water and oxygen and can be dissolved by weak acid. It is commonly used in the production of carbon steels and in specialty chemical applications such as the production of batteries.
Around 75% of the identified global manganese resource base of approximately 5 billion tonnes is located in South Africa. Mined manganese ore is generally classified as High Grade (>44% Mn), Medium Grade (39-43% Mn) or Low Grade (<38% Mn).
Applications Steel Steel production accounts for approximately 90% of global manganese demand. Manganese ore is smelted to create manganese ferro-alloys, which assist in the removal of oxygen and sulphur from steel, increase the hardness and elasticity of steel and improve its welding and abrasion resistance characteristics. The three primary manganese ferro-alloys are High Carbon Ferromanganese (“HCFeMn”), Silico manganese (“SiMn”) and Refined Ferromanganese (“Refined FeMn”), which require varying grades of manganese ore and use different production processes for their manufacture:
Manganese Ferro-Alloys Preferred Manganese Primary Production Ferro-alloy %Mn Ore Type facilities Primary end uses HCFeMn 70-82 Medium to High grade Electric or blast . manufacture of normal and HCFeMn furnace high-carbon steel . flat steel products, specialty steel applications SiMn 57-75 Medium grade Electric SiMn furnace . deoxidization and alloying agent . long steel products (typically for construction) Refined FeMn 75-85 Medium to High grade Electric arc furnace . stainless steel . high Strength low alloy steel . flat steel products . specialty steel applications
Properties of manganese ore that are important to manganese ferro-alloy producers include:
. low levels of the major slag forming elements including silicon, calcium, magnesium and aluminium;
. low levels of sulphur impurities, as manganese is added in steel making to remove sulphur;
and For personal use only use personal For . low levels of other impurities such as phosphorus, which can affect steel welding characteristics.
Chemicals Use of manganese for chemical applications represents around 7% of manganese consumption. Due to the various colours of manganese ions, it is used as a pigment in industrial applications. Alkaline and zinc-carbon batteries use manganese dioxide as a cathode as a result of its excellent
9
electron receptor properties. Manganese is also used in fertilisers, crop protection, water purification, as a laboratory reagent (in the form of potassium permanganate) and for medical applications.
3.2 The Manganese Market
There are no satisfactory substitutes for manganese that are viable in relation to the production of steel, as no other product has been found that removes sulphur and oxygen from steel whilst providing similar technical benefits. The price of and demand for manganese is therefore expected to be driven in the long term by world steel production movements. Steel production is closely related to world GDP and industrial production growth, although steel demand growth tends to slow as economies become wealthier and a greater proportion of GDP growth is contributed by services and high value-add activities. Global steel production and hence manganese demand grew very slowly towards the end of the 20th century. Global steel production grew by no more than a cumulative 1% per annum over the period 1980-2000. The steel market during this period was generally characterised by excess steelmaking capacity which resulted in subdued pricing.
Since the early 2000s, accelerating manganese demand growth from developing nations (and, in particular, dramatic growth in Chinese demand) has significantly changed the overall demand/supply balance. While steel production ex-China has experienced little or no growth, rapid Chinese industrialization has resulted in strong growth in Chinese steel production. As a result, China’s share of global demand for manganese has grown dramatically, from around 50% in 2004 to over 70%. Given the relatively slow rates of growth of demand for manganese in developed economies and the absolute size of the Chinese economy, Chinese growth in demand is expected to be the major determinant of aggregate demand growth for the next decade. Global demand for manganese ferro-alloys is expected to grow at an average rate of 3% p.a. to reach 24.3Mt per annum by 2027, from around 16.5Mt in 2013, with steel supply growing 2.7% to reach 2.3Bt per annum over the same period.
An additional factor contributing to the growing demand for manganese ferro-alloys from China and other developing nations is a greater intensity of manganese consumption per unit of steel production, with Chinese producers using more than 10.5kg manganese per tonne of steel, while parts of Europe use only 8.5kg/t.
Long term steel production growth is forecast at around 3%, which is substantially lower than actual growth over the last decade. These lower growth forecasts reflect:
. high current Chinese steel production despite slowing economic growth in China; . excess capacity in China and elsewhere, which is likely to continue to suppress pricing and discourage production growth;
. low utilisation rates in Europe; and . an expected maturation of the Chinese economy and a consequent tempering of its growth.
Mine supply of manganese is a function both of factors relating to the discovery and development of manganese deposits and of manganese prices, with higher manganese prices stimulating the development of ore bodies that might otherwise not be developed. Recently, Indonesian ore export bans (which became effective in early 2014) have increased consumers’ reliance on other
For personal use only use personal For manganese ore sources. While China has significant manganese supply, nearly all of its manganese deposits are of low grade and China is therefore heavily reliant on importing large quantities of high grade ore for its smelters. In 2012, South Africa, Australia, Ghana and Gabon supplied 78% of China’s 12.38Mt of manganese ore imports.
10
The following table shows reserves and annual production data for some of the world’s largest manganese mines:
Manganese Projects 12 months Reserves Date of production Date of Mine Owners Location Mn (Mt) Data Mn ore (kt) Data GEMCO BHP (60%) Australia 101 @ 44.7% 30-Jun-13 5,027 30-Jun-13 Anglo American (40%)
Woodie Woodie Consolidated Minerals Australia 15.4 @ 34% 30-Jun-13 1,632 31-Dec-13
Daxin CITIC Dameng Holdings China 70.2 @ 19.0% 31-Dec-13 1,455 31-Dec-13 Limited
Moanda ERAMET (63.71%) Gabon 1,900 1-Jan-14 c.3,000 31-Dec-12 Gabonese Republic (28.94%) Others (7.34%)
Nsuta Consolidated Minerals Ghana 37.6 @ 27.2% 30-Jun-13 1,812 31-Dec-13
Wessels/Mamatwan BHP (44.4%) South 141 @ 39.9% 30-Jun-13 3,490 30-Jun-13 Anglo American (29.6%) Africa BEE (26%)
Nchwaning, Gloria, Assmang South 110.3 @ 43.9% 30-Jun-12 3,300 30-Jun-12 Black Rock Africa 93.8 @ 37.6% Source: AME, company reports
Until 2012, the generally accepted manganese benchmark was 48% Mn FOB Australia, which reflected annual agreements/contracts between Japanese steelmakers and BHP. The benchmark changed to 44% Mn CIF Tianjin in 2013, with a monthly pricing structure and a deeper spot market, as a result of initiatives by major producing companies. Although the new benchmark more closely reflects the market in which the majority of ore is sold, it has resulted in increased price volatility and lower prices as a result of increased competition in a weak market.
The following table summarises manganese ore production, ferro-alloy demand and price movements for the period 2009-2013:
Worldwide Manganese Industry (‘000 tonnes) 2009 2010 2011 2012 2013 Total Manganese ore production 30,937 36,723 39,568 41,495 44,424 Manganese Ferro-Alloy demand 12,826 14,285 15,749 16,561 17,060 Price US$/dmtu Mn 5.44 8.63 5.93 4.90 5.43 Note: the price relates to a product grading 48% Mn and is FOB Australia for the period 2009-2012 and a product grading 44% Mn and is CFR China since 2013. Source: AME
3.3 Manganese Prices
Prices in recent times have been impacted by global overcapacity in ferro-alloys in markets such as India and China, new ore capacity in locations such as South Africa, and increasing levels of Chinese ore stockpiles (in 2010 and 2011), although these have subsequently returned to more manageable levels.
Recent manganese prices in US$ and A$ terms are compared to the long run manganese price
For personal use only use personal For assumptions adopted by Grant Samuel for valuation purposes below:
11
Manganese Benchmarks (Oct 2012 - Jun 2014) $7.00
$6.00
$5.00
$4.00
$3.00
Price (US$/dmtu) $2.00
$1.00
$0.00 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Metal Bulletin 44% Mn Ore Cif Tianjin Metal Bulletin 38% Mn Ore FOB Port Elizabeth
Source: Bloomberg
Grant Samuel’s long term price assumption of US$4.75-5.75/dmtu for manganese is broadly consistent with the range of forecast price assumptions used by the small number of market analysts. The long term prices assumed are above the spot prices prevailing for 44% Mn grade ore (CIF) Tianjin prevailing in early June 2014 of around US$4.24/dmtu. The general weakness and overcapacity in the steel and manganese ferro-alloy markets, as well as the number of new projects that are scheduled to come online (both mines and smelters) over the next few years suggests that the pricing fundamentals of the market are unlikely to change dramatically in the short to medium term.
For personal use only use personal For
12
Appendix 2
Selection of Discount Rates
1 Overview
Grant Samuel has selected discount rates in the range of 9.5-10.5% to apply to the forecast nominal ungeared after tax cash flows for Aquila’s major assets.
Selection of the appropriate discount rate to apply to the forecast cash flows of any business enterprise is fundamentally a matter of judgement. The valuation of an asset or business involves judgements about the discount rates that may be utilised by potential acquirers of that asset. There is a body of theory which can be used to support that judgement. However, a mechanistic application of formulae derived from that theory can obscure the reality that there is no “correct” discount rate. Despite the growing acceptance and application of various theoretical models, it is Grant Samuel’s experience that many companies rely on less sophisticated approaches. Many businesses and investors use relatively arbitrary “hurdle rates” which do not vary significantly from investment to investment or change significantly over time despite interest rate movements. Valuation is an estimate of what real world buyers and sellers of assets would pay and must therefore reflect criteria that will be applied in practice even if they are not theoretically correct. Grant Samuel considers the rates adopted to be reasonable discount rates that acquirers would use irrespective of the outcome of any particular theoretical model.
The discount rate that Grant Samuel has adopted is reasonable relative to the rates derived from theoretical models. The discount rate represents an estimate of the weighted average cost of capital (“WACC”) appropriate for these assets. Grant Samuel has calculated a WACC based on a weighted average of the cost of equity and the cost of debt. This is the relevant rate to apply to ungeared cash flows. There are three main elements to the determination of an appropriate WACC. These are: . cost of equity; . cost of debt; and . debt/equity mix.
WACC is a commonly used basis but it should be recognised that it has shortcomings in that it: . represents a simplification of what are usually much more complex financial structures; and . assumes a constant degree of leverage which is seldom correct.
The cost of equity has been derived from application of the capital asset pricing model (“CAPM”) methodology. The CAPM is probably the most widely accepted and used methodology for determining the cost of equity capital. There are more sophisticated multivariate models which utilise additional risk factors but these models have not achieved any significant degree of usage or acceptance in practice. However, while the theory underlying the CAPM is rigorous the practical application is subject to shortcomings and limitations and the results of applying the CAPM model should only be regarded as providing a general guide. There is a tendency to regard the rates calculated using CAPM as inviolate. To do so is to misunderstand the limitations of the model. For example: . the CAPM theory is based on expectations but uses historical data as a proxy. The future is not
necessarily the same as the past; For personal use only use personal For . the measurement of historical data such as risk premia and beta factors is subject to very high levels of statistical error. Measurements vary widely depending on factors such as source, time period and sampling frequency; . the measurement of beta is often based on comparisons with other companies. None of these companies is likely to be directly comparable to the entity for which the discount rate is being calculated and may operate in widely varying markets;
1
. parameters such as the debt/equity ratio and risk premium are based on subjective judgements; and . there is not unanimous agreement as to how the model should adjust for factors such as taxation. The CAPM was developed in the context of a “classical” tax system. Australia’s system of dividend imputation has a significant impact on the measurement of net returns to investors.
The cost of debt has been determined by reference to the pricing implied by the debt markets in Australia. The cost of debt represents an estimate of the expected future returns required by debt providers.
Selection of an appropriate debt/equity mix is a matter of judgement. The debt/equity mix represents an appropriate level of gearing, stated in market value terms, for the business over the forecast period. The relevant proportions of debt and equity have been determined having regard to the financial gearing of the industry in general and comparable companies, and judgements as to the appropriate level of gearing considering the nature and quality of the cash flow stream.
The following sections set out the basis for Grant Samuel’s determination of the discount rates for Aquila’s businesses and the factors which limit the accuracy and reliability of the estimates.
2 Definition and Limitations of the CAPM and WACC
The CAPM provides a theoretical basis for determining a discount rate that reflects the returns required by diversified investors in equities. The rate of return required by equity investors represents the cost of equity of a company and is therefore the relevant measure for estimating a company’s weighted average cost of capital. CAPM is based on the assumption that investors require a premium for investing in equities rather than in risk free investments (such as government bonds). The premium is commonly known as the market risk premium and notionally represents the premium required to compensate for investment in the equity market in general.
The risks relating to a company or business may be divided into specific risks and systematic risks. Specific risks are risks that are specific to a particular company or business and are unrelated to movements in equity markets generally. While specific risks will result in actual returns varying from expected returns, it is assumed that diversified investors require no additional returns to compensate for specific risk, because the net effect of specific risks across a diversified portfolio will, on average, be zero. Portfolio investors can diversify away all specific risk.
However, investors cannot diversify away the systematic risk of a particular investment or business operation. Systematic risk is the risk that the return from an investment or business operation will vary with the market return in general. If the return on an investment was expected to be completely correlated with the return from the market in general, then the return required on the investment would be equal to the return required from the market in general (i.e. the risk free rate plus the market risk premium).
Systematic risk is affected by the following factors: . financial leverage: additional debt will increase the impact of changes in returns on underlying assets and therefore increase systematic risk; . cyclicality of revenue: projects and companies with cyclical revenues will generally be subject to greater systematic risk than those with non-cyclical revenues; and . operating leverage: projects and companies with greater proportions of fixed costs in their cost structure will generally be subject to more systematic risk than those with lesser proportions of fixed
For personal use only use personal For costs.
CAPM postulates that the return required on an investment or asset can be estimated by applying to the market risk premium a measure of systematic risk described as the beta factor. The beta for an investment reflects the covariance of the return from that investment with the return from the market as a whole. Covariance is a measure of relative volatility and correlation. The beta of an investment represents its systematic risk only. It is not a measure of the total risk of a particular investment. An investment with a beta of more than one is riskier than the market and an investment with a beta of less
2
than one is less risky. The discount rate appropriate for an investment which involves zero systematic risk would be equal to the risk free rate.
The formula for deriving the cost of equity using CAPM is as follows:
Re = Rf + Beta (Rm – Rf)
Where: Re = the cost of equity capital; Rf = the risk free rate; Beta = the beta factor; Rm = the expected market return; and Rm - Rf = the market risk premium.
The beta for a company or business operation is normally estimated by observing the historical relationship between returns from the company or comparable companies and returns from the market in general. The market risk premium is estimated by reference to the actual long run premium earned on equity investments by comparison with the return on risk free investments.
The formula conventionally used to calculate a WACC under a classical tax system is as follows:
WACC = (Re x E/V) + (Rd x (1-t) x D/V)
Where: E/V = the proportion of equity to total value (where V = D + E); D/V = the proportion of debt to total value; Re = the cost of equity capital; Rd = the cost of debt capital; and t = the corporate tax rate
The models, while simple, are based on a sophisticated and rigorous theoretical analysis. Nevertheless, application of the theory is not straightforward and the discount rate calculated should be treated as no more than a general guide. The reliability of any estimate derived from the model is limited. Some of the issues are discussed below:
. Risk Free Rate
Theoretically, the risk free rate used should be an estimate of the risk free rate in each future period (i.e. the one year spot rate in that year if annual cash flows are used). There is no official “risk free” rate but rates on government securities are typically used as an acceptable substitute. More importantly, forecast rates for each future period are not readily available. In practice, the long term Commonwealth Government Bond rate is used as a substitute in Australia and medium to long term Treasury Bond rates are used in the United States. It should be recognised that the yield to maturity of a long term bond is only an average rate and where the yield curve is strongly positive (i.e. longer term rates are significantly above short term rates) the adoption of a single long term bond rate has the effect of reducing the net present value where the major positive cash flows are in the initial years. The long term bond rate is therefore only an approximation.
The ten year bond rate is a widely used and accepted benchmark for the risk free rate. Where the forecast period exceeds ten years, an issue arises as to the appropriate bond to use. While longer
For personal use only use personal For term bond rates are available, the ten year bond market is the deepest long term bond market in Australia and is a widely used and recognised benchmark. There is a very limited market for bonds of more than ten years. In the United States, there are deeper markets for longer term bonds. The 30 year bond rate is a widely used benchmark. However, long term rates accentuate the distortions of the yield curve on cash flows in early years. In any event, a single long term bond rate matching the term of the cash flows is no more theoretically correct than using a ten year rate. More importantly, the ten year rate is the standard benchmark used in practice.
3
. Market Risk Premium
The market risk premium (Rm - Rf) represents the “extra” return that investors require to invest in equity securities as a whole over risk free investments. This is an “ex-ante” concept. It is the expected premium and as such it is not an observable phenomenon. There is no generally accepted approach to estimating a forward looking market risk premium and therefore the historical premium is used as the best available proxy measure. The premium earned historically by equity investments is usually calculated over a time period of many years, typically at least 30 years. This long time frame is used on the basis that short term numbers are highly volatile and that a long term average return would be a fair indication of what most investors would expect to earn in the future from an investment in equities with a 5-10 year time frame.
In the United States it is generally believed that the premium is in the range of 5-6% but there are widely varying assessments (from 3% to 9%). Australian studies have been more limited and mainly derive from the Officer Study1 which was based on data for the period 1883 to 1987 (prior to the introduction of dividend imputation) and indicated that the long run average premium was in the order of 8% using an arithmetic average but subject to significant statistical error2. More recently, the Officer Study has been updated to 20113 with the long term average declining to around 6%. However, due to concerns about the earlier market data, Officer now places emphasis on the average risk premium since 1958 which is estimated to be 5.9% ignoring the impact of imputation4.
In addition, the market risk premium is not constant and changes over time. At various stages of the market cycle investors perceive that equities are more risky than at other times and will increase or decrease their expected premium. Indeed, prior to 2008 there were arguments being put forward that the risk premium was lower than it had been historically while today there is evidence to indicate that current market risk premiums are above historical averages. However, there is no accepted approach to deal with changes in market risk premia for current conditions.
. Beta Factor
The beta factor is a measure of the expected covariance (i.e. volatility and correlation of returns) between the return on an investment and the return from the market as a whole. The expected beta factor cannot be observed. The conventional practice is to calculate an historical beta from past share price data and use it as a proxy for the future but it must be recognised that the expected beta is not necessarily the same as the historical beta. A company’s relative risk does change over time.
The appropriate beta is the beta of the company being acquired rather than the beta of the acquirer (which may be in a different business with different risks). Betas for the particular subject company may be utilised. However, it is also appropriate (and may be necessary if the investment is not listed) to utilise betas for comparable companies and sector averages (particularly as those may be more reliable).
However, there are very significant measurement issues with betas which mean that only limited reliance can be placed on such statistics. There is no “correct” beta. For example:
over the last three years Aquila’s beta as measured by the Australian Graduate School of Management (“AGSM”) has varied between 1.85 and 3.42 and, in fact, in December 2013 was measured at 1.88; and
For personal use only use personal For 1 R.R. Officer in Ball, R., Brown, P., Finn, F. J. & Officer, R. R., “Share Market and Portfolio Theory: Readings and Australian Evidence” (second edition), University of Queensland Press, 1989 (“Officer Study”). 2 The “true” figure lies within a range of approximately 2-10% at a 95% confidence level. 3 Dr. S. Bishop and Professor R.R. Officer, “Review of Debt Risk Premium and Market Risk Premium” (February 2013), prepared for Aurizon Holdings Limited. 4 Where the market return explicitly includes a component for imputation benefits of 1.0 the market risk premium over the same period is around 6.5%.
4
the standard error of the AGSM’s estimate of the Aquila beta has generally been in the order of 0.20 meaning that for a beta of, say, 2.0 even at a 68% confidence level, the range is 1.80 to 2.20. . Debt/Equity Mix
The tax deductibility of the cost of debt means that the higher the proportion of debt the lower the WACC, although this would be offset, at least in part, by an increase in the beta factor as leverage increases.
The debt/equity mix assumed in calculating the discount rate should be consistent with the level implicit in the measurement of the beta factor. Typically, the debt/equity mix changes over time and there is significant diversity in the levels of leverage across companies in a sector. There is a tendency to calculate leverage at a point in time whereas the leverage should represent the average over the period the beta was measured. This can be difficult to assess with a meaningful degree of accuracy.
The measured beta factors for listed companies are “equity” betas and reflect the financial leverage of the individual companies. It is possible to unleverage beta factors to derive asset betas and releverage betas to reflect a more appropriate or comparable financial structure. In Grant Samuel’s view this technique is subject to considerable estimation error. Deleveraging and releveraging betas exacerbates the estimation errors in the original beta calculation and gives a misleading impression as to the precision of the methodology. Deleveraging and releveraging is also incorrectly calculated based on debt levels at a single point in time.
In addition, the actual debt and equity structures of most companies are typically relatively complex. It is necessary to simplify this for practical purposes in this kind of analysis.
Finally, it should be noted that, for this purpose, the relevant measure of the debt/equity mix is based on market values not book values.
. Specific Risk
The WACC is designed to be applied to “expected cash flows” which are effectively a weighted average of the likely scenarios. To the extent that a business is perceived as being particularly risky, this specific risk should be dealt with by adjusting the cash flow scenarios. This avoids the need to make arbitrary adjustments to the discount rate which can dramatically affect estimated values, particularly when the cash flows are of extended duration or much of the business value reflects future growth in cash flows. In addition, risk adjusting the cash flows requires a more disciplined analysis of the risks that the valuer is trying to reflect in the valuation.
However, it is also common in practice to allow for certain classes of specific risk (particularly sovereign and other country specific risks) in a different way by adjusting the discount rate applied to forecast cash flows.
3 Calculation of WACC for Aquila’s major assets
3.1 Cost of Equity Capital
The cost of equity capital has been estimated by reference to the CAPM. Grant Samuel has
adopted a cost of equity capital of: For personal use only use personal For
Cost of Equity Capital Business Operation Cost of Equity Capital Iron Ore 9.7-10.3% Coal and Manganese 9.7-10.3%
5
. Risk Free Rate
Grant Samuel has adopted a risk free rate of 3.7%. The risk free rate approximates the current yield to maturity on ten year Australian Government bonds. . Market Risk Premium
Grant Samuel has consistently adopted a market risk premium of 6% and believes that this continues to be a reasonable estimate. It:
is not statistically significantly different to the premium suggested by long term historical data;
is similar to that used by a wide variety of analysts and practitioners (typically in the range 5-7%); and
makes no explicit allowance for the impact of Australia’s dividend imputation system. . Beta Factor
Grant Samuel has adopted beta factors in the following ranges for the purposes of estimating the discount rates to apply to the projected cash flows from Aquila’s major assets:
Equity Beta Factors Business Operation Beta Factor Iron Ore 1.0-1.1 Coal and Manganese 1.0-1.1
Grant Samuel has considered the beta factors for a wide range of iron ore and coal companies in determining an appropriate beta for Aquila’s iron ore and coal assets. As there are very few listed pure manganese companies, Grant Samuel has adopted the same beta factor for Aquila’s manganese asset as the beta selected for the coal assets. Steel production is the primary driver of both coking coal and manganese production and coking coal and manganese will be exposed to the same macro factors. The betas have been calculated on two bases relative to each company’s home exchange index and relative to the Morgan Stanley Capital International Developed World Index (“MSCI”), an international equities market index that is widely used as a proxy for the global stockmarket as a whole. Where a company is extensively traded by global investors it can be argued that the regression against the MSCI is more relevant but:
this depends on who the “price setting” investors are; and
it raises a related issue as to whether a global risk premium is also appropriate and, if so, what that global premium is.
A summary of betas for selected comparable listed companies is set out in the table below:
For personal use only use personal For
6
Beta Factors for Selected Iron Ore Companies Monthly Observations Weekly Observations Market over 4 years over 2 years Capital- 5 7 Company isation AGSM / Bloomberg Bloomberg (A$ LBS/Barr Local 8 Local millions) 6 MSCI MSCI a Index Index Aquila 1,008.9 1.88 1.40 1.31 1.89 1.32 Producing Rio Tinto Ltd 103,754 1.48 1.33 1.12 1.24 0.85 Vale SA 70,214 0.31 0.78 0.92 0.80 0.47 Fortescue Metals Group 13,732 1.63 1.66 1.35 1.42 0.84 Kumba Iron Ore 10,569 1.22 1.19 0.81 1.69 0.95 Cliffs Natural Resources 2,580 2.35 2.08 2.23 1.50 1.81 Ferrexpo PLC 1,450 1.54 2.37 2.47 2.78 2.86 Mount Gibson Iron 802 2.16 1.62 0.98 1.98 1.52 Atlas Iron Ltd 627 1.44 1.34 1.11 1.89 0.99 African Minerals Ltd 638 1.15 1.35 1.64 1.86 1.71 BC Iron Ltd 437 1.53 1.31 0.91 1.18 0.24 MMX Mineracao E Metalicos SA 186 1.18 (1.18) (2.26) 1.86 (1.62) Grange Resources 197 0.89 0.85 1.11 0.57 0.73 Western Desert Resources 192 1.47 1.29 1.01 1.10 0.71 London Mining PLC 97 1.21 1.50 1.33 1.77 1.51 Minimum 0.31 (1.18) (2.26) 0.57 (1.62) Maximum 2.35 2.37 2.47 2.78 2.86 Median 1.46 1.33 1.11 1.59 0.90 Weighted average 1.09 1.17 1.07 1.14 0.75 Exploration/Development Sundance Resources Ltd 283 1.86 1.42 1.61 1.45 0.76 Alderon Iron Ore Corp 189 3.32 3.64 2.50 0.91 0.69 Iron Road Ltd 192 2.09 1.76 1.62 0.85 0.52 Iron Ore Holdings Ltd 135 1.65 1.71 1.04 1.35 0.75 Sable Mining Africa Ltd 140 1.32 1.60 1.71 (0.17) (0.32) Flinders Mines Ltd 48 1.90 1.42 1.93 1.60 0.83 Minimum 1.42 1.04 -0.17 -0.32 1.42 Maximum 3.64 2.50 1.60 0.83 3.64 Median 1.65 1.66 1.13 0.72 1.65 Weighted average 1.98 1.74 0.99 0.55 1.98 Source: AGSM, London Business School, Barra and Bloomberg
5 Based on share prices as at 30 May 2014, except Aquila which is based on its share price as at 2 May 2014 (being the day prior to announcement of the proposed Takeover Proposal). 6 United Kingdom beta factors calculated by London Business School (“LBS”) and other beta factors are calculated by MSCI Barra,
For personal use only use personal For Inc. (“Barra”) as at 29 May 2014 over a period of 60 months using ordinary least squares regression or the Scholes-Williams technique (including lag) where the stock is thinly traded. 7 Bloomberg betas have been calculated up to 28 May 2014. Grant Samuel understands that betas estimated by Bloomberg are not calculated strictly in conformity with accepted theoretical approaches to the estimation of betas (i.e. they are based on regressing total returns rather than the excess return over the risk free rate). However, in Grant Samuel’s view the Bloomberg beta estimates can still provide a useful insight into the systematic risks associated with companies and industries. The figures used are the Bloomberg “adjusted” betas.
8 MSCI is calculated using local currency so that there is no impact of currency changes in the performance of the index.
7
The table shows outcomes that suggest it is extremely difficult to determine a reliable beta for Aquila:
Aquila’s beta varies significantly depending on the measurement source (AGSM, Bloomberg etc) and, as discussed earlier, has varied significantly over time;
some individual company betas vary significantly depending on which market index is utilised (Local or MSCI); and
gearing levels vary significantly but this is not always consistent with beta factors.
The evidence shows that betas for listed iron ore companies, both those in production and those focussed on exploration and development, is in a very wide range, although the betas for producing companies are generally lower than those for exploration and development companies. This makes sense intuitively as it indicates that producing companies are less risky than exploration and development companies, which are exposed to additional risks (although beta, as a measure of systematic risk only, should not incorporate adjustments for specific risks such as development risk).
Estimation of an appropriate beta to apply to the West Pilbara project is problematic. West Pilbara is the largest independently owned undeveloped iron ore project in Australia and has a substantial reserve and very large resource base underpinning a long mine life. Given its location it is subject to limited sovereign risk, and, once developed, it is expected to enjoy first quartile cash costs. There are no exploration and development companies or mid-sized producing companies with assets that are directly comparable to West Pilbara project. Potential ownership of rail and port infrastructure further differentiates West Pilbara project from the mid-sized iron ore producers, which typically rely on access to third party infrastructure. On this basis the West Pilbara project is arguably more comparable with the operations of large iron ore mining companies that own both mines and the associated infrastructure. The betas of the large iron ore companies have generally been in the range 0.8-1.2 except for the beta of Fortescue Metals Group which has been higher at around 1.4- 1.6, potentially reflecting its higher gearing level and higher operating costs.
Of the total projected capital investment of around $7.0-8.0 billion to develop the West Pilbara project, approximately $6.0 billion is associated with infrastructure assets. The infrastructure assets represent a significant proportion of the overall value of the West Pilbara project and arguably the beta for the project should reflect at least to some extent the low risk characteristics of infrastructure asset. Accordingly, Grant Samuel has also considered the betas of selected Australian infrastructure companies.
For personal use only use personal For
8
Beta Factors for Selected Australian Infrastructure Companies Monthly Observations Weekly Observations Market over 4 years over 2 years Capital- Company isation9 Bloomberg11 Bloomberg (A$ 10 AGSM Local 12 Local millions) MSCI MSCI Index Index Aurizon Holdings Ltd 10,558 0.60 0.62 0.95 0.64 0.60 Asciano Ltd 5,462 0.03 0.32 0.79 0.48 0.03 Toll Holdings Ltd 3,887 1.44 1.01 1.18 0.72 1.44 Qube Holdings Ltd 2,449 0.84 0.84 0.89 0.90 0.84 Minimum 0.03 0.32 0.79 0.48 0.03 Maximum 1.44 1.01 1.18 0.90 1.44 Median 0.72 0.73 0.92 0.68 0.72 Weighted average 0.63 0.64 0.95 0.64 0.63 Source: AGSM and Bloomberg
The table shows outcomes that suggest that betas for infrastructure companies may be in the range 0.6-1.0. In any event, these betas appear to be considerably lower than those for many of the iron ore companies.
Having regard to the above, there appear to be arguments to suggest that a beta of around 1.0- 1.1 would be appropriate for estimating the cost of capital that should apply for West Pilbara. On the other hand, West Pilbara is still at the pre-development stage. It is not theoretically appropriate to adjust the beta for development risks (because the beta should reflect only systematic risks and should not take into account specific risks such as development risks). But there are good arguments to suggest that the beta should be adjusted to take into account the significant capital expenditure required to develop West Pilbara. This capital expenditure may be thought of as akin to gearing in a company’s capital structure – it has the effect of amplifying the effects on asset returns of changes in profitability. The extent of the adjustment required is not obvious, and adoption of an inappropriately high beta would have the effect of “penalising” longer dated production, which in the case of a long life asset such as West Pilbara contributes a significant proportion of the overall value. Grant Samuel has judgementally selected an alternative range of betas of 1.4.-1.6 to reflect the “gearing effect” of the capital expenditure to be incurred at West Pilbara. As set out in the remainder of this Appendix, Grant Samuel has calculated WACCs for West Pilbara on the basis of betas in the range 1.0-1.1 and in the range 1.4-1.6. .
9 Based on share prices as at 2 June 2014. 10 For personal use only use personal For The Australian beta factors calculated by the Australian Graduate School of Management (“AGSM”) as at 31 December 2013 over a period of 48 months using ordinary least squares regression or the Scholes-Williams technique where the stock is thinly traded. 11 Bloomberg betas have been calculated up to 28 May 2014. Grant Samuel understands that betas estimated by Bloomberg are not calculated strictly in conformity with accepted theoretical approaches to the estimation of betas (i.e. they are based on regressing total returns rather than the excess return over the risk free rate). However, in Grant Samuel’s view the Bloomberg beta estimates can still provide a useful insight into the systematic risks associated with companies and industries. The figures used are the Bloomberg “adjusted” betas.
12 MSCI is calculated using local currency so that there is no impact of currency changes in the performance of the index.
9
Beta Factors for Selected Coal Companies13 Monthly Observations Weekly Observations Market over 4 years over 2 years Capital- Company isation14 Bloomberg16 Bloomberg (A$ 15 AGSM Local 17 Local millions) MSCI MSCI Index Index Producing New Hope 2,476.2 0.89 0.67 0.62 0.57 0.38 Whitehaven 1,569.3 0.71 0.68 0.82 1.11 0.67 Wollongong Coal 176.8 1.33 0.93 0.92 0.82 0.69 Minimum 0.71 0.67 0.62 0.57 0.38 Maximum 1.33 0.93 0.92 1.11 0.69 Median 0.89 0.68 0.82 0.82 0.67 Weighted average 0.84 0.68 0.71 0.78 0.50 Exploration/Development Cockatoo Coal 141.4 1.77 2.02 1.26 1.58 0.93 Guildford Coal 53.3 1.55 0.96 0.39 1.58 1.11 Bandanna Energy 41.8 3.16 2.22 1.81 2.10 0.76 Stanmore Coal 26.1 1.88 1.42 1.38 0.70 0.32 NuCoal Resources 10.8 1.03 0.71 1.01 0.76 0.56 East Energy 7.5 1.77 1.93 2.00 1.41 1.02 Acacia Coal 7.2 1.32 0.83 0.31 1.07 1.28 Metrocoal 5.2 0.89 0.83 0.70 0.91 0.69 Coalbank 5.1 1.31 1.09 1.16 0.50 0.63 Minimum 0.89 0.71 0.31 0.50 0.32 Maximum 3.16 2.22 2.00 2.10 1.28 Median 1.55 1.09 1.16 1.07 0.76 Weighted average 1.87 1.69 1.17 1.50 0.87 Source: AGSM, Bloomberg
While the table shows outcomes that suggest betas for comparable listed coal companies in a reasonably wide range, it shows that coal producing companies generally have lower betas (at around (0.7-0.9) than coal exploration and development companies (predominantly greater 1.0). This makes sense intuitively as it indicates that coal producing companies have lower risk than the overall market whereas coal exploration and development companies have higher risk than the overall market.
Aquila’s major coal asset, Eagle Downs, is currently under construction. In that sense its beta should arguably sits somewhere between the betas for producing coal companies and the betas for exploration/development companies, although the major part of the capital
13 Excludes Yancoal and Malabar Coal as these companies have not been listed for sufficiently long to obtain the necessary number of data points. 14 Based on share prices as at 28 May 2014. 15 For personal use only use personal For The Australian beta factors calculated by the Australian Graduate School of Management (“AGSM”) as at 31 December 2013 over a period of 48 months using ordinary least squares regression or the Scholes-Williams technique where the stock is thinly traded. 16 Bloomberg betas have been calculated up to 28 May 2014. Grant Samuel understands that betas estimated by Bloomberg are not calculated strictly in conformity with accepted theoretical approaches to the estimation of betas (i.e. they are based on regressing total returns rather than the excess return over the risk free rate). However, in Grant Samuel’s view the Bloomberg beta estimates can still provide a useful insight into the systematic risks associated with companies and industries. The figures used are the Bloomberg “adjusted” betas.
17 MSCI is calculated using local currency so that there is no impact of currency changes in the performance of the index.
10
expenditures for Eagle Downs is still to be incurred. Taking these factors into account, Grant Samuel believes that a beta in the range 1.0-1.1 is a reasonable estimate of the appropriate beta for Aquila’s coal assets.
. Calculation
Using the estimates set out above, the cost of equity capital for Aquila’s major assets can be calculated as follows:
Costs of Equity Capital Business Operation Low High Formula Re = Rf + Beta(Rm-Rf) Re = Rf + Beta(Rm-Rf)
Iron Ore (betas of 1.0 – 1.1) = 3.7% + (1.0 x 6%) = 3.7% + (1.1 x 6%) = 9.7% = 10.3%
Iron Ore (betas of 1.4 – 1.6) = 3.7% + (1.4 x 6%) = 3.7% + (1.6 x 6%) = 12.1% = 13.3%
Coal and Manganese = 3.7% + (1.0 x 6%) = 3.7% + (1.1 x 6%) = 9.7% = 10.3%
3.2 Cost of Debt
A cost of debt of 5.2 % has been adopted based on a margin of 1.5% over the risk free rate. This figure represents the expected future cost of borrowing over the duration of the cash flow model. Grant Samuel believes that this would be a reasonable estimate of an average interest rate, including a margin, that would match the duration of the cash flows assuming that the operations were funded with a mixture of short term and long term debt.
3.3 Debt/Equity Mix
The selection of the appropriate debt/equity ratio involves perhaps the most subjectivity of discount rate selection analysis. In determining an appropriate debt/equity mix, regard was had to gearing levels of Aquila and the peer group companies used in the beta analysis.
Gearing levels for these companies for the past four years are set out below:
For personal use only use personal For
11
Gearing Levels for Selected Listed Iron Ore Companies Net Debt/(Net Debt + Market Capitalisation)
Financial Year Ended 18 4 Year Current Historical 4 Historical 3 Historical 2 Historical 1 Average
Aquila nc nc nc nc nc nc Producing Rio Tinto 3.1% 8.8% 13.8% 13.1% 13.6% 9.7% Vale SA 9.1% 15.2% 18.4% 23.1% 25.5% 16.5% Fortescue Metals Group 13.9% 9.4% 28.3% 54.9% 36.9% 26.6% Kumba Iron Ore nc nc 2.3% 1.2% 1.6% 0.3% Cliffs Natural Resources 0.6% 23.8% 36.8% 32.8% 42.6% 23.5% Ferrexpo PLC 2.7% 3.1% 14.9% 25.3% 53.0% 11.5% Mount Gibson Iron nc nc 0.7% nc nc nc Atlas Iron Ltd nc nc nc nc nc nc African Minerals Ltd nc 19.5% nc 27.9% 38.9% 6.1% BC Iron Ltd nc 0.5% nc nc nc nc MMX Mineracao E Metalicos SA nc 17.8% 48.3% 11.5% 18.6% 12.4% Grange Resources nc nc nc nc nc nc Western Desert Resources Ltd nc nc nc 7.8% 9.8% nc London Mining PLC nc 17.9% 34.7% 50.7% 123.9% 21.9% Exploration/Development Sundance Resources Ltd nc nc nc nc 0.5% nc Alderon Iron Ore Corp nc nc nc nc nc nc Iron Road Ltd nc nc nc nc nc nc Iron Ore Holdings Ltd nc nc nc nc nc nc Sable Mining Africa Ltd nc nc nc nc nc nc Flinders Mines Ltd nc nc nc nc nc nc Source: Bloomberg and Grant Samuel analysis
Gearing Levels for Selected Australian Infrastructure Companies Net Debt/(Net Debt + Market Capitalisation)
Financial Year Ended 19 4 Year Current Historical 4 Historical 3 Historical 2 Historical 1 Average Aurizon Holdings Ltd na 7.7% 11.7% 21.1% 19.0% 13.5% Asciano Ltd 32.4% 32.0% 38.9% 38.2% 37.9% 35.4% Toll Holdings Ltd 19.5% 22.7% 28.4% 24.9% 25.6% 23.9% Qube Holdings Ltd na 2.4% 17.7% 22.2% 16.9% 14.1% Source: Bloomberg and Grant Samuel analysis
For personal use only use personal For
18 Current gearing levels are based on the most recent balance sheet information and on sharemarket prices as at 28 May 2014. 19 Current gearing levels are based on the most recent balance sheet information and on sharemarket prices as at 28 May 2014.
12
Gearing Levels for Selected Listed Coal Companies Net Debt/(Net Debt + Market Capitalisation)
Financial Year Ended 20 4 Year Current Historical 4 Historical 3 Historical 2 Historical 1 Average
Producing New Hope nc nc nc nc nc nc Whitehaven nc nc nc 16.7% 26.2% 16.7% Yancoal 94.6% 91.1% 79.3% 86.5% 94.7% 87.9% Wollongong Coal 17.1% 17.6% 65.3% 54.2% 71.2% 38.5% Exploration/Development Cockatoo Coal nc nc 26.8% 82.2% 3.4% 54.5% Guildford Coal nc nc nc 25.9% 56.3% 25.9% Bandanna Energy nc nc nc 344.3% nc 344.3% Stanmore Coal nc nc nc nc nc nc Malabar Coal na na na nc nc nc NuCoal Resources nc nc nc nc nc nc East Energy nc nc nc 47.8% 66.2% 47.8% Acacia Coal 1.9% nc nc nc nc 1.9% Metrocoal nc nc nc nc nc nc Coalbank nc nc 0.7% 14.0% 21.7% 7.3% Source: Bloomberg and Grant Samuel analysis
The selection of gearing levels is highly judgemental. The table shows a very wide range of gearing levels. The debt levels should actually be the weighted average measured over the same period as the beta factor rather than just at the current point in time. Moreover, these do not always bear any relationship to the betas of the individual companies. In some cases lowly geared companies still have equity betas towards the higher end of the range.
The larger iron ore producing companies generally have gearing levels in the 10-30% range whilst the smaller producers and exploration and development companies in most cases have had net cash position (shown in the above table as “nc”).
The infrastructure companies generally have gearing in the 20%-30% range.
Having regard to the above, the debt/equity mix for West Pilbara has been estimated as 75- 85% equity and 15-25% debt.
Many of the comparable listed coal companies, particularly those in the exploration and development phase, have a net cash position. Those that do have debt in their capital structure have seen their gearing increase considerably over the last two years as the market capitalisation of listed coal companies has plummeted following the decline in coal prices over this period.
Having regard to the above, the debt/equity mix for Aquila’s coal assets has been estimated as 90- 100% equity and 0-10% debt. This is regarded as being broadly consistent with a beta factor of 1.0-1.1. Similarly, Grant Samuel has adopted a debt/equity mix of 90-100% equity and 0-10% debt for Aquila’s manganese assets. For personal use only use personal For
20 Current gearing levels are based on the most recent balance sheet information and on sharemarket prices as at 28 May 2014.
13
3.4 WACC
On the basis of the parameters outlined and assuming a corporate tax rate of 30%, the nominal WACC for Aquila’s major assets are calculated as follows:
Calculated WACCs Business Operation Low High Formula = Ke(E/V)+Kd(1-t)(D/V) = Ke(E/V)+Kd(1-t)(D/V)
Iron Ore (betas of 1.0 – 1.1) = (9.7% x 75%) + (5.2% x = (10.3% x 85%) + (5.2% x 0.7 x 25%) 0.7 x 15%) = 8.2% = 9.3%
Iron Ore (betas of 1.4 – 1.6) = (12.1% x 75%) + (5.2% x = (13.3% x 85%) + (5.2% x 0.7 x 25%) 0.7 x 15%) = 10.0% = 11.9%
Coal and Manganese = (9.7% x 90%) + (5.2% x = (10.3% x 100%) + (5.2% 0.7 x 10%) x 0.7 x 0%) = 9.1% = 10.3%
These calculated discount rates are after tax discount rates to be applied to nominal ungeared after tax cash flows. However, it must be recognised that these are crude calculations based on statistics of limited reliability and involving a multitude of assumptions.
More importantly, the discount rates must be consistent with the rates that real world acquirers of the assets might use, regardless of the validity or defensibility of the assumptions that have been adopted in the calculation of theoretical discount rates. In this regard, in Grant Samuel’s view, discount rates of 8.2-9.3% (ie rates consistent with betas of 1.0-1.1) are clearly too low to apply in the valuation of West Pilbara. Conversely, a rate of 11.9% (consistent with a beta of 1.6) appears too high, and would result in little or no value being placed on the longer dated cash flows from the project. Grant Samuel has judgmentally adopted discount rates in the range 9.5-10.5% to apply to the West Pilbara cash flows.
The calculated weighted average cost of capital for the coal assets are 9.1-10.3%. The bottom end of this range (9.1%) is in Grant Samuel’s view lower than the discount rate that would be applied by prospective acquirers of the assets. Grant Samuel had judgementally adopted slightly higher discount rates of 9.5-10.5%. These are consistent with the discount rates used by at least some participants in the coal sector.
4 Dividend Imputation
The conventional WACC formula set out above was formulated under a “classical” tax system. The CAPM model is constructed to derive returns to investors after corporate taxes but before personal taxes. Under a classical tax system, interest expense is deductible to a company but dividends are not. Investors are also taxed on dividends received. Accordingly, there is a benefit to equity investors from increased gearing.
Under Australia’s dividend imputation system, domestic equity investors now receive a taxation credit For personal use only use personal For (franking credit) for any tax paid by a company. The franking credit attaches to any dividends paid out by a company and the franking credit offsets personal tax. To the extent the investor can utilise the franking credit to offset personal tax, then the corporate tax is not a real impost. It is best considered as a withholding tax for personal taxes. It can therefore be argued that the benefit of dividend imputation should be added into any analysis of value.
There is no generally accepted method of allowing for dividend imputation. In fact, there is considerable debate within the academic community as to the appropriate adjustment or even whether any adjustment
14
is required at all. Some suggest that it is appropriate to discount pre tax cash flows, with an increase in the discount rate to “gross up” the market risk premium for the benefit of franking credits that are on average received by shareholders. On this basis, the discount rate might increase by approximately 2% but it would be applied to pre tax cash flows. However, not all of the necessary conditions for this approach exist in practice:
. not all shareholders can use franking credits. In particular, foreign investors gain no benefit from franking credits. If foreign investors are the marginal price setters in the Australian market there should be no adjustment for dividend imputation. In this context, foreign investors represent less than 50% of Aquila’s share register;
. not all franking credits are distributed to shareholders; and . capital gains tax operates on a different basis to income tax. Investors with high marginal personal tax rates will prefer cash to be retained and returns to be generated by way of a capital gain.
Others have proposed a different approach involving an adjustment to the tax rate in the discount rate by a factor reflecting the effective use or value of franking credits. If the credits can be used, the tax rate is reduced towards zero. The proponents of this approach have in the past suggested a factor in the range 50-65% as representing the appropriate adjustment (gamma). Alternatively, the tax charge in the forecast cash flows can be decreased to incorporate the expected value of franking credits distributed.
There is undoubtedly merit in the proposition that dividend imputation affects value. Over time dividend imputation will become factored into the determination of discount rates by corporations and investors. In Grant Samuel’s view, however, the evidence gathered to date as to the value the market attributes to franking credits is insufficient to rely on for valuation purposes. More importantly, Grant Samuel does not believe that such adjustments are widely used by acquirers of assets at present. While acquirers are undoubtedly attracted by franking credits there is no clear evidence that they will actually pay extra for them or build it into values based on long term cash flows. The studies that measure the value attributed to franking credits are based on the immediate value of franking credits distributed and do not address the risk and other issues associated with the ability to utilise them over the longer term. Accordingly, it is
Grant Samuel’s opinion, that it is not appropriate to make any adjustment. For personal use only use personal For
15 For personal use only
Appendix 3
Market Evidence – Coal Transactions and Listed Companies
1 Valuation Evidence from Transactions
Set out below is a summary of recent transactions involving the acquisition of either individual metallurgical coal resources or projects or corporate entities operating in the coal industry in Australia:
Aquila Resources’ Coal Assets – Comparable Asset and Company Transactions Implied Implied Value per Tonne of: Reserves Resources Meas Suitable Value Resource/Tenement/ Interest 2 (100% (100% & Ind Reserves Res- M&I Date Acquirer Main Coal Basin Mine Coal Type (100% 3 Project/Target acquired 1 basis) basis) (% (A$/t) ources Resources Type basis) (Mt) (Mt) Resources) (A$m) (A$/t) (A$/t) Jan 14 MDL 162 Wesfarmers 100.0% Bowen OC HCC, PCI, TC 70 67 255 63% 1.04 0.27 0.44 Dec 13 Carabella Resources China Kingho Energy 100.0% Bowen OC PCI, CC, TC 64 11 166 72% 5.86 0.39 0.54 Limited Group Oct 13 Blackwood Cockatoo Coal 100.0% Galilee/Surat/ - TC 18 0 374 0% na 0.05 na Corporation Limited Bowen Aug 13 Gujarat NRE Coking Jindal Steel and Power 22.1% Illawarra UG LW CC 917 94 624 32% 9.78 1.47 4.53 Coal Limited Aug 13 Coalbank Limited Loyal Strategic 75.0% Surat OC TC 10 0 1,300 0% na 0.01 na Investments Mar 13 Vickery South Whitehaven 29.0% Gunnedah OC SSCC, TC 105 na 52 na na 2.02 na Project Jan 13 Idalia Coal Pty East Energy Resources 100.0% Eromanga - TC 51 0 440 0% na 0.11 na Limited Oct 12 Endocoal Limited U&D Mining Industry 100.0% Bowen OC TC, PCI 72 13 499 18% 5.53 0.14 0.79 (Australia) May 12 Coalworks Limited Whitehaven 100.0% Gunnedah OC SSCC, TC 184 0 1,353 53% na 0.14 0.26 May 12 Rockland Richfield Linyi Mining Group 100.0% Bowen Basin - SSCC 186 0 482 8% na 0.39 4.59 Limited Jul 12 Sonoma mine Qcoal and JSS 45.0% Bowen OC HCC, TC 313 na 170 na na 1.84 na Apr 12 Isaac Plains Sumitomo 50.0% Bowen OC CC, PCI, TC 860 50 128 74% 17.30 6.72 9.08
1 OC = Open cut, UG LW = Underground longwall 2 HCC = Hard coking coal, CC = Coking coal, SSCC = semi-soft coking coal, PCI = Pulverised injection coal, TC = thermal coal 3 Attributable Reserves and Resources shown for corporate entity transactions
1 For personal use only
Aquila Resources’ Coal Assets – Comparable Asset and Company Transactions Implied Implied Value per Tonne of: Reserves Resources Meas Suitable Value Resource/Tenement/ Interest 2 (100% (100% & Ind Reserves Res- M&I Date Acquirer Main Coal Basin Mine Coal Type (100% 3 Project/Target acquired 1 basis) basis) (% (A$/t) ources Resources Type basis) (Mt) (Mt) Resources) (A$m) (A$/t) (A$/t) Dec 11 Gloucester Coal Ltd Yancoal Australia 100.0% Gloucester, Hunter OC, UG CC, TC 2,288 292 1,840 66% 7.83 1.24 1.89 Valley, Bowen Dec 11 Aston Resources Whitehaven 100.0% Gunnedah OC SSCC, TC 1,962 272 509 65% 7.23 3.86 5.93 Limited May 11 Codrilla Project Coppabella and Moorvale 13.8% Bowen OC PCI 544 50 80 70% 10.88 6.85 9.81 Joint Venture (CMJV) Oct 11 Maules Creek J Power 10.0% Gunnedah OC SSCC, TC 3,700 329 679 65% 11.25 5.45 8.39 Dec 10 Maules Creek ITOCHU 15.0% Gunnedah OC SSCC, TC 2,300 356 610 72% 6.46 3.77 5.24 Aug 10 MDL 162 Macarthur Coal 90.0% Bowen OC Semi-HCC, PCI 372 na 222 62% na 1.68 2.70 Aug 10 Middlemount Gloucester 50.0% Bowen OC Semi-HCC, PCI 755 57 123 99% 13.25 6.16 6.25 Jul 10 Sutton Forest POSCO 70.0% Southern Coal UG CC, TC 72 na 115 100% na 0.62 0.62 Field NSW Jun 10 Belvedere Hard Vale 24.5% Bowen UG LW HCC 612 na 2,475 40% na 0.25 0.61 Coking Coal project Jun 10 Belvedere Hard Vale 24.5% Bowen UG LW HCC 442 na 2,475 40% na 0.18 0.44 Coking Coal project Aug 09 Narrabri Korean Investors 7.5% Gunnedah UG LW PCI 1,813 172 438 69% 10.55 4.14 5.98 Aug 08 Narrabri EDF Trading 7.5% Gunnedah UG LW PCI 1,722 103 438 69% 16.76 3.93 5.68 Aug 08 Narrabri J-Power 7.5% Gunnedah UG LW PCI 1,667 103 438 69% 16.23 3.80 5.50 Jul 08 New Saraji Coal BHP-Mitsubishi (BMA) 100.0% Bowen UG LW CC 2,450 na 690 23% na 3.55 15.71 Project Feb 08 Narrabri Yudean 7.5% Gunnedah UG LW PCI 900 103 438 69% 8.76 2.05 2.97 Dec 07 Foxleigh Mine Anglo American 70.0% Bowen OC PCI 1,030 60 290 na 17.17 3.55 na Minimum 1.04 0.01 0.26 Maximum 17.30 6.85 15.71 Median 10.17 1.76 4.56 Average 10.37 2.31 4.45 Source: AMC and Grant Samuel analysis
2 For personal use only
2 Valuation Evidence from Sharemarket Prices
The sharemarket ratings of selected listed coal companies are set out below.
Aquila Resources’ Coal Assets - Comparable Listed Companies
Meas Implied Value per Tonne of: Suitable & Ind Company Main Coal Basin Mine Coal Type Enterprise Reserves Resources M&I (% Type Value Attributable Attributable Reserves Resources Resources (A$m) (Mt) (Mt) Resources) (A$/t) (A$/t) (A$/t) Producing
Yancoal Australia Limited Sydney, Hunter Valley, OC, UG LW CC, TC 5,107 652 3,504 79% 7.84 1.46 1.85 Bowen Whitehaven Coal Limited Gunnedah OC, UG LW TC, PCI 2,139 709 3,308 67% 3.02 0.65 0.96 New Hope Corporation Limited Bowen, Surat, Maryborough OC TC 1,363 639 2,413 63% 2.13 0.56 0.90 Wollongong Coal Limited Illawarra UG LW CC 614 125 652 na 4.92 0.94 na Minimum 2.13 0.56 0.90 Maximum 7.84 1.46 1.85 Median 3.97 0.79 0.96 Simple average 4.48 0.90 1.24
Exploration and Development
Cockatoo Coal Limited Surat, Bowen OC PCI, TC 159 266 2,039 41% 0.60 0.08 0.19 Guildford Coal Limited South Gobi (Mongolia), OC TC, PCI, 124 0 2,461 88% na 0.05 0.06 Galilee, Bowen CC East Energy Resources Limited Eromanga, Galiliee - TC 22 0 2,181 29% na 0.01 0.04 Stanmore Coal Limited Bowen, Surat UG LW, OC CC, TC 16 118 913 25% 0.14 0.02 0.07 Malabar Coal Limited Upper Hunter Valley UG LW CC 11 31 215 63% 0.35 0.05 0.08 Coalbank Limited Eromanga, Surat, Moreton, OC TC 7 0 1,300 0% na 0.01 na Esk Bandanna Energy Limited Bowen, Galilee UG LW, OC TC, PCI 6 174 533 53% 0.04 0.01 0.02 Acacia Coal Limited Bowen OC, UG LW SHCC 3 0 65 25% na 0.05 0.18 Minimum 0.04 0.01 0.02 Maximum 0.60 0.08 0.19 Median 0.24 0.03 0.07 Simple average 0.28 0.03 0.09 Source: IRESS, company announcements, Grant Samuel analysis
3
Appendix 4
Market Evidence - Manganese Transactions
Set out below is a summary of transactions involving manganese assets in Africa over the last five years for which there is sufficient information to calculate meaningful valuation parameters:
Recent Transaction Evidence – Manganese Industry Resource Multiple2 Consideration1 Date Bidder Target Transaction (times) ($ millions) $/t Manganese contained Eurasian Natural Dec 2011 Rubio Holdings Limited Purchase of Rubio 292 5.55 Resources Corporation Plc Tshipi é Ntle Manganese Purchase of 49.9% March 2010 Jupiter Mines Limited 511 8.44 (Proprietary) Mining Limited stake in Tshipi Tshipi é Ntle Manganese Purchase of (Proprietary) Mining Limited Sep 2009 OM Holdings Ltd effective 62.9% 4823 7.95 & Ntsimbintle Mining stake in Tshipi (Proprietary) Limited Source: Grant Samuel analysis4
A brief summary of each transaction is set out below:
Tshipi é Ntle Manganese (Proprietary) Mining Limited/Jupiter Mines Limited On 1 March 2010, Jupiter Mines Limited (“Jupiter”) announced that it had agreed to acquire a 49.9% equity interest (and the associated shareholder loans) in Tshipi é Ntle Manganese (Proprietary) Mining Limited (“Tshipi”) from Pallinghurst Kalahari (Mauritius) Limited (“PKML”) (39.2%) and Investec Bank Limited (“Investec”) (10.7%). Consideration for the transaction was $244.8 million for the equity and $10.2 million for the shareholder loans. The proposed transaction implied a value, at announcement, of $511 million for 100% of Tshipi. Tshipi had two manganese interests, the Mamatwan mining right and the Wessels prospecting right, adjacent to the Mamatwan and Wessels manganese mines, owned by Hotazel Manganese Mines (Pty) Limited (“HMM”), a special purpose vehicle majority owned by Samancor Manganese Pty Limited (“Samancor”). At the time of announcement, the project had resources of 163Mt of 37.1% grade manganese ore. The transaction completed on 8 November 2011. This transaction implies a value for Aquila’s 74% stake in Avontuur of $340 million.
Ntsimbintle Mining (Proprietary) Limited & Tshipi é Ntle Manganese (Proprietary) Mining Limited/OM Holdings Ltd On 28 September 2009, OM Holdings Ltd (“OMH”) announced that it had agreed to subscribe for a 26% interest of new equity in Ntsimbintle Mining (Proprietary) Limited (“Ntsimbintle”) for cash consideration of $49.2 million. Ntsimbintle owed a 50.1% interest in Tshipi. This was completed on 27 May 2010 for an amount of $63.8 million in accordance with an updated agreement. As a second part of the transaction, OMH was to acquire the 49.9% stake in Tshipi belonging to the Pallinghurst consortium by issuing 139.9 million OMH shares, pro-rata, to the members of the Pallinghurst consortium. At announcement, the OMH equity consideration had a value of $253.9 million. The proposed transaction implied a value, at announcement, of $482 for 100% of Tshipi. On 28 September 2009, Pallinghurst announced that this component of the transaction
had been cancelled due to an inability to reach an agreement with OMH. At the time of announcement, the For personal use only use personal For
1 Implied equity value if 100% of the company or business had been acquired. 2 Represents gross consideration divided by contained manganese resource. Gross consideration is the sum of the equity and/or cash consideration plus borrowings net of cash. 3 Assumes no additional assets for Ntsimbintle other than the stake in Tshipi. 4 Grant Samuel analysis based on data obtained from IRESS, Capital IQ, company announcements, and transaction.
1
project had resources of 163Mt of 37.1% grade manganese ore. This transaction implies a value for Aquila’s 74% stake in Avontuur of $320 million.
Rubio Holdings Limited/Eurasian Natural Resources Corporation Plc In December 2011, Eurasian Natural Resources Corporation Plc (“Eurasian”) announced the acquisition of Rubio Holdings Limited (“Rubio”) for US$295 million. The main asset of Rubio was the pre-development Kongoni Manganese Project in the Kalihari Manganese Field in South Africa which had resources at the time of the time of the transaction of 147MT at a grade of 35.7% manganese. This transaction implies a value for Aquila’s 74% stake in Avontuur of $223 million.
For personal use only use personal For
2
Appendix 5
Report by AMC Consultants Pty Ltd For personal use only use personal For
1 AMC Consultants Pty Ltd ABN 58 008 129 164
Ground Floor, 9 Havelock Street WEST PERTH WA 6005 AUSTRALIA
T +61 8 6330 1100 F +61 8 6330 1199 E [email protected] W amcconsultants.com
Aquila Resources Limited Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd
AMC Project 214034 20 June 2014
For personal use only use personal For Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
20 June 2014
The Directors Grant Samuel & Associates Pty Ltd Level 6, 1 Collins Street MELBOURNE Vic 3000
Dear Sirs
Independent Technical Specialist's Report Aquila Resources Limited
On 5 May 2014, Aquila Resources Limited (Aquila) announced that it had received a takeover proposal from Baosteel Resources Australia Pty Ltd and Aurizon Operations Limited (Bidders). The Bidders proposed to make an off-market takeover offer (Offer) for all the shares in Aquila that they did not already own. On 14 May, Aquila received a Bidder’s Statement from the Bidders.
Aquila engaged Grant Samuel & Associates Pty Ltd (Grant Samuel) to prepare an independent expert’s report (IER) in relation to the Offer.
AMC Consultants Pty Ltd (AMC) was engaged to provide technical advice concerning the mineral assets (Mineral Assets) of Aquila and report to Grant Samuel in relation to its preparation of the IER.
In particular, Grant Samuel instructed AMC to review estimates of Mineral Resources and Ore Reserves, capital costs, production estimates and operating costs for Aquila’s Eagle Downs, West Pilbara Iron Ore, Washpool and Avontuur mineral assets, and advise Grant Samuel as to whether these estimates are reasonable for valuation purposes. Grant Samuel advised that: It was likely that it would want to consider a number of development/production scenarios for these assets. These scenarios may be based on extensions to current Ore Reserves and/or the potential for variations in future production rates.
In addition, Grant Samuel required AMC to prepare valuations of Aquila’s other undeveloped resources and exploration interests.
Grant Samuel required that AMC prepare an independent technical specialist’s report (ITSR) setting out: The scope of its engagement. The nature of the work performed. A description of Aquila’s assets and their planned development. AMC’s conclusions as to the technical assumptions regarding mining inventory, capital costs, production profiles, and operating costs for each of the valuation scenarios, which AMC refers to in this report as its Production Cases. AMC’s valuations of Aquila’s other undeveloped resources and exploration interests.
Grant Samuel advised that the ITSR will be appended to the IER.
The Production Cases provided by AMC to Grant Samuel include mining and processing schedules, and capital and operating cost estimates, and are based on information provided by Aquila. AMC considers that
For personal use only use personal For those Production Cases cover a range of reasonable operating strategies and are based on reasonable grounds and assumptions. AMC considers that the information it has in relation to the valuation of the undeveloped resources and exploration interests, is sufficient.
The Production Cases developed by AMC do not include off-site costs such as head office or corporate costs, which are considered by Grant Samuel.
amcconsultants.com i
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
AMC has undertaken its commission to prepare this ITSR as a Specialist in accordance with the VALMIN Code1 to the extent that the code is relevant to AMC's engagement.
AMC's use, in this ITSR, of the terms Mineral Resources and Ore Reserves is in accordance with the 2012 JORC Code2. However, all of the Mineral Resources and Ore Reserves presented in this ITSR were first reported in accordance with the 2004 JORC Code3. The totals of Mineral Resource and Ore Reserve estimates presented in this ITSR have been rounded.
For the purposes of preparing this ITSR, AMC visited (in May 2014) Aquila's Eagle Downs project which is in construction, reviewed material technical reports and management information, and communicated with management staff both at the Eagle Downs site and in the Perth office of Aquila. AMC has not visited the West Pilbara Iron Ore Project (WPIOP), or the Washpool or Avontuur project sites, or the exploration projects. AMC is familiar with the deposits of the type that form the WPIOP and considers that due to pre- development or inactive exploration status of the WPIOP, the other projects, and the undeveloped resources and exploration interests, no additional material information or data would be gained by such site visits. AMC is satisfied that Aquila has provided sufficient information for AMC’s informed appraisal to be made without such site visits.
AMC has not audited the information provided to it, but has aimed to satisfy itself that all of the information has been prepared in accordance with proper industry standards and is based on data that AMC considers to be of acceptable quality and reliability. Where AMC has not been so satisfied, AMC has included comment in this ITSR and made modifications in the Production Cases provided to Grant Samuel.
AMC presents the ITSR which follows in the form of: Mineral Assets. Eagle Downs Hard Coking Coal. Washpool Hard Coking Coal. West Pilbara Iron Ore. Avontuur Manganese. Exploration Properties. Qualifications.
All monetary figures in this report are expressed in 2014 Australian dollars ($ or A$), United States dollars (US$), or South African Rand (ZAR) unless otherwise noted. Costs are presented on a cash cost basis unless otherwise specified.
Reporting of production and costs in this report is presented on a financial year (June to July) basis unless otherwise specified.
For definitions of abbreviations used in this ITSR, refer to Appendix A, and for contributors to this ITSR, refer to Appendix B.
1 Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports, The VALMIN Code 2005 Edition, Prepared by The VALMIN Committee, a joint committee of the Australasian Institute of Mining and
For personal use only use personal For Metallurgy, the Australian Institute of Geoscientists and the Mineral industry Consultants Association with the participation of the Australian Securities and Investment Commission, the Australian Stock Exchange Limited, the Minerals Council of Australia, the Petroleum Exploration Society of Australia, the Securities Association of Australia and representatives from the Australian finance sector. 2 Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, The JORC Code 2012 Edition, Effective 20 December 2012, Mandatory from 1 December 2013. Prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia (JORC). 3 Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, The JORC Code 2004 Edition, Effective December 2004. Prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia (JORC).
amcconsultants.com ii
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
This ITSR can be summarized as follows:
AMC’s Production Cases
AMC has prepared production schedules, and capital and operating cost projections (Production Cases) for use by Grant Samuel. The Production Cases, with their respective life-of-mine (LOM) product and cost attributes are summarized in Table I. AMC considers that those Production Cases are based on reasonable grounds and assumptions. The delivery of those Production Cases, however, is exposed to technical risks, and there are also technical opportunities beyond those cases. The Production Cases, risks, and opportunities are presented in the ITSR which follows.
The Production Cases (Table I) developed by AMC do not include off-site costs such as head office or corporate costs, which are considered by Grant Samuel.
Table I Production Cases
Project Commodity Product Product LOM Operating Production Rate Tonnes Grade Capital Cost (Mt) Cost Eagle Downs AMC Production Hard Coking 151 NA $3.5B $13.4B 3.0 Mtpa Average Coal Production Case 1 Coal Rate; Single Longwall AMC Production Hard Coking 151 NA $3.8B $12.3B 5.2 Mtpa Average Coal Production Case 2 Coal Rate; Two Longwalls Washpool AMC Production Hard Coking 39 NA $372M $4.9B 2.9 Mtpa Coal Production Rate Case Coal WPIOP AMC Production 490 57%Fe $7.7B $13.5B 30 Mtpa Ore Production Rate, Stage 1 Iron ore Case 1 AMC Production 623 58%Fe $9.6B $16.0B 45 Mtpa Ore Production Rate, Stage 1 Iron ore Case 2 and Hardey Avontuur AMC Production Manganese 23 40%Mn $243M $4.2B 1.5 Mtpa Ore Production Rate Case Ore Thabazimbi AMC Expected 66 62%Fe $339M $4.7B 4 Mtpa Ore Production Rate Iron ore Value Case Note: WPIOP capital cost excludes residual value of rail and port infrastructure.
AMC’s Exploration Valuations
AMC has valued Aquila’s interests in non-Production Case Mineral Resources and exploration properties (Exploration Valuations) using Exploration Valuation methods. The Exploration Valuation methods are commonly used in Australia and are described in the ITSR which follows. AMC’s Exploration Valuations are summarized in Table II.
Table II Exploration Valuations (Aquila's interests)
Mineral Asset Low High Preferred ($M) ($M) ($M) Washpool Exploration Project 30 37 34
For personal use only use personal For Coal Exploration Tenements 40 109 73 WPIOP Detrital and Channel Iron 101 341 221 Hardey deposit 58 88 73 Innawalley Pool deposit 5 17 11 Thabazimbi Project (Meletse deposit) 50 100 75 Thabazimbi Exploration Project 3.0 4.3 3.5 North Cape Exploration Project 0.9 1.6 1.3
amcconsultants.com iii
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
In Table II, it should be noted that: The Exploration Valuation for the Washpool Exploration Project is based on the same Mineral Resource as is used for the Washpool Production Case. Coal Exploration Tenements do not include the Washpool Exploration Project. The Exploration Valuation for WPIOP Detrital and Channel Iron; Hardey deposit, and Innawalley Pool deposit are in addition to the value inherent in WPIOP Production Case 1 shown in Table I. The Exploration Valuation for WPIOP Detrital and Channel Iron and Innawalley Pool deposit are in addition to the value inherent in WPIOP Production Case 2 shown in Table I. The Thabazimbi Project (Meletse deposit) is an Expected Value based on the Meletse Mineral Resource. The Exploration Valuation for the Thabazimbi Exploration Project is in addition to the value inherent in the Thabazimbi Expected Value Case in Table I.
Aquila has provided AMC with independent reports on the standing of Aquila’s tenements. Those reports indicate that the tenements are in good standing and, therefore, AMC has prepared this ITSR on that basis.
Yours faithfully
K Sommerville L J Gillett FAusIMM (CP) FAusIMM (CP) Principal Mining Engineer Director
For personal use only use personal For
amcconsultants.com iv
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Contents 1 Mineral assets ...... 1 1.1 Projects ...... 1 1.2 Principal sources of information ...... 1 1.3 Standing of tenements ...... 2 2 Eagle Downs ...... 3 2.1 Location ...... 3 2.2 Geology and mineralization...... 3 2.2.1 Regional geology ...... 3 2.2.2 Local geology ...... 4 2.3 Coal Resources ...... 4 2.4 Exploration and resource development ...... 5 2.5 Coal Reserves ...... 5 2.6 Production scenarios ...... 6 2.7 Mining operations ...... 6 2.7.1 Conditions impacting on mining ...... 6 2.7.2 Mine design and scheduling strategies ...... 7 2.7.3 Two Longwall Scenario ...... 8 2.7.4 Development ...... 8 2.7.4.1 Development equipment ...... 8 2.7.4.2 Development productivity ...... 8 2.7.5 Longwall mining ...... 9 2.7.5.1 Longwall productivity ...... 9 2.7.5.2 Longwall mining equipment ...... 9 2.7.5.3 Longwall top coal caving ...... 10 2.7.6 Capital expenditure – mining ...... 10 2.7.7 Operating cost – mining ...... 11 2.8 Quality ...... 11 2.8.1 General observations ...... 11 2.8.2 Yield ...... 11 2.8.3 Classification ...... 12 2.8.4 Summary ...... 12 2.9 Metallurgy and processing operations ...... 12 2.9.1 Coal plant design ...... 12 2.9.2 Coal plant arrangements ...... 12 2.9.3 Capital expenditure – processing ...... 13 2.9.4 Operating cost – processing ...... 13 2.10 Infrastructure and services ...... 13 2.10.1.1 Power ...... 13 2.10.1.2 Water ...... 13 2.11 Port and rail ...... 13 2.12 Environmental and community issues ...... 13 2.12.1 Existing environmental values and liabilities ...... 14 2.12.2 Approvals status and key issues ...... 14 2.12.3 Environmental compliance issues and cost estimates ...... 15 2.12.4 Mine closure, rehabilitation and financial assurance ...... 15 2.12.5 Workforce accommodation and community context ...... 15 2.12.6 Summary of environmental considerations ...... 16 2.13 AMC Production Cases ...... 16 2.13.1 Eagle Downs Production Case 1 ...... 16 2.13.2 Eagle Downs Production Case 2 ...... 17
For personal use only use personal For 2.14 Key risks and opportunities ...... 17 2.14.1.1 Risks ...... 17 2.14.1.2 Opportunities ...... 17 3 Washpool Hard Coking Coal ...... 19 3.1 Location and background ...... 19 3.2 Geology and mineralization...... 19 3.2.1 Regional geology ...... 19 3.2.2 Local geology ...... 19
amcconsultants.com v
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3.3 Mineral Resources ...... 19 3.4 Exploration and resource development ...... 20 3.5 Ore Reserves ...... 20 3.6 Production scenario ...... 20 3.6.1 Option proposal ...... 20 3.6.2 Preferred production schedule ...... 21 3.7 Mining operations ...... 21 3.7.1 Key mining outcomes of the Washpool SS ...... 21 3.7.2 Mine planning ...... 23 3.7.3 Mining fleet ...... 23 3.7.4 Mining development ...... 24 3.7.5 Engineering procurement and construction management ...... 24 3.7.6 Mining method ...... 24 3.7.7 Workforce ...... 25 3.7.8 Operating Cost – mining ...... 25 3.7.9 Capital Cost – mining ...... 26 3.8 Quality ...... 26 3.8.1 Classification ...... 27 3.8.2 Summary points ...... 27 3.9 Metallurgy and processing operations ...... 27 3.9.1 Washpool DFS...... 27 3.9.2 Washpool SS ...... 28 3.9.3 Coal preparation plant arrangement ...... 28 3.9.3.1 Plant feed sizing and ROM storage ...... 28 3.9.3.2 Dense medium circuit ...... 28 3.9.3.3 Fines circuit ...... 28 3.9.3.4 Ultra-fines circuit ...... 29 3.9.3.5 Reject handling ...... 29 3.9.3.6 Product handling and train load-out ...... 29 3.9.3.7 Plant performance ...... 29 3.10 Infrastructure and services ...... 30 3.11 Port and rail ...... 30 3.12 Environmental and community issues ...... 31 3.12.1 Existing environmental values and liabilities ...... 31 3.12.2 Approvals status and key issues ...... 31 3.12.3 Environmental issues ...... 32 3.12.4 Community issues ...... 32 3.12.5 Mine closure, rehabilitation and financial assurance ...... 32 3.13 AMC Production Case ...... 33 3.14 Key risks and opportunities ...... 33 3.14.1 Risks ...... 33 3.14.2 Opportunities ...... 34 4 West Pilbara Iron Ore Project ...... 35 4.1 Location ...... 35 4.2 Geology and mineralization...... 36 4.3 Mineral Resources ...... 37 4.4 Ore Reserves ...... 39 4.5 Production scenarios ...... 40 4.6 Mining operations ...... 41 4.6.1 Status of project ...... 41 4.6.2 Conditions impacting on mining ...... 41 4.6.3 Mining operating and capital costs ...... 42 For personal use only use personal For 4.6.4 Adjacent leases ...... 42 4.7 Quality – WPIOP fines ...... 42 4.8 Minerals Processing ...... 43 4.8.1 Description ...... 43 4.8.2 Plant design ...... 43 4.8.2.1 Stage 1 ...... 43 4.8.2.2 Stage 2 ...... 44 4.8.3 Cost estimates – process plant ...... 44
amcconsultants.com vi
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.9 Infrastructure and services ...... 44 4.9.1 Rail ...... 44 4.9.2 Port ...... 45 4.10 Environmental and community issues ...... 45 4.10.1 Overview ...... 45 4.10.2 Statutory environmental approvals ...... 45 4.10.3 Flora and fauna...... 46 4.10.4 Water management ...... 46 4.10.5 Acid and metalliferous drainage ...... 46 4.10.6 Closure and rehabilitation ...... 47 4.11 AMC Production Cases ...... 47 4.11.1 WPIOP Production Case 1 ...... 48 4.11.2 WPIOP Production Case 2 ...... 48 4.12 Exploration Valuation ...... 48 4.13 Key risks and opportunities ...... 49 4.13.1 Risks ...... 49 4.13.2 Opportunities ...... 50 5 Avontuur Manganese ...... 51 5.1 Location and background ...... 51 5.2 Geology and mineralization...... 51 5.3 Mineral Resources ...... 52 5.4 Ore Reserves ...... 54 5.5 Production schedule ...... 54 5.6 Mining operations ...... 55 5.6.1 Status of project ...... 55 5.6.2 Conditions impacting on mining ...... 55 5.6.3 Mining operating and capital costs ...... 56 5.7 Metallurgy and processing operations ...... 56 5.7.1 Process description ...... 56 5.7.2 Feed system and product handling ...... 57 5.7.3 Capital expenditure – process plant ...... 57 5.7.4 Operating cost – process plant ...... 58 5.7.5 Process conclusion ...... 58 5.8 Product logistics ...... 58 5.9 Environmental and community issues ...... 59 5.9.1 Overview ...... 59 5.9.2 Statutory approvals ...... 60 5.9.3 Flora and fauna...... 60 5.9.4 Water management ...... 60 5.9.5 Closure and rehabilitation ...... 60 5.9.6 Dust, noise and traffic ...... 61 5.9.7 Community ...... 61 5.9.8 Environmental and community risks ...... 61 5.9.9 Exploration Valuation ...... 61 5.10 AMC Avontuur Production Case ...... 62 5.11 Key risks and opportunities ...... 62 5.11.1 Risks ...... 62 5.11.2 Opportunities ...... 63 6 Exploration properties ...... 64 6.1 Coal ...... 64 6.1.1 Summary of key technical factors...... 69
For personal use only use personal For 6.1.2 Potential environmental constraints to coal exploration projects ...... 70 6.1.2.1 Talwood Coking Coal – environment and social ...... 70 6.1.2.2 Wilpeena PCI Coal Project – environment and social ...... 71 6.1.2.3 Walton PCI Coal Project – environment and social ...... 71 6.1.2.4 Summary of potential environmental constraints to exploration tenements ...... 71 6.1.3 Valuation methods ...... 73 6.1.4 Valuation range...... 76
amcconsultants.com vii
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
6.1.5 Preferred values ...... 76 6.2 Iron Ore ...... 77 6.2.1 Thabazimbi Iron Ore Project ...... 77 6.2.1.1 Geology ...... 77 6.2.1.2 Exploration ...... 79 6.2.1.3 Mining ...... 80 6.2.1.4 Processing ...... 80 6.2.1.5 Environment and community issues ...... 81 6.2.1.6 Key risks and opportunities ...... 82 6.2.1.7 AMC Expected Value case ...... 82 6.2.1.8 Valuation ...... 83 6.2.2 Other South African iron ore exploration ...... 83 7 Qualifications ...... 85
Tables Table 2.1 Eagle Downs Coal Resources by seam as at January 2011 ...... 5 Table 2.2 Eagle Downs Coal Reserve as at 31 March 2011 ...... 5 Table 3.1 Washpool Coal Resources as at July 2011 ...... 20 Table 3.2 Washpool Schedule SS Option 2 schedule summary ...... 22 Table 3.3 Washpool mining fleet ...... 23 Table 3.4 Washpool volumes per equipment type ...... 23 Table 3.5 Washpool workforce per category ...... 25 Table 3.6 Washpool mining operating cost ...... 26 Table 3.7 Washpool Production Case ...... 33 Table 4.1 WPIOP Mineral Resources as at April 2013 ...... 37 Table 4.2 WPIOP Ore Reserve by classification as at December 2010 ...... 39 Table 4.3 WPIOP Ore Reserve by product as at December 2010 ...... 39 Table 4.4 WPIOP Production Case 1 schedule – Stage 1 ...... 40 Table 4.5 WPIOP Production Case 2 additional schedule – Stage 2 ...... 40 Table 4.6 WPIOP Operational features that may impact on mining performance and cost ...... 42 Table 4.7 WPIOP Ore Reserve grades by product ...... 43 Table 4.8 WPIOP valuation of tenements not considered in Production Case 1 ...... 49 Table 4.9 WPIOP valuation of tenements not considered in Production Case 2 ...... 49 Table 5.1 Avontuur Mineral Resources as at August 2013 ...... 52 Table 5.2 Avontuur Ore Reserve as at November 2011 ...... 54 Table 5.3 Avontuur mining and plant feed ...... 54 Table 5.4 Avontuur technical status and assessment ...... 55 Table 5.5 Avontuur mine plan – key aspects ...... 55 Table 5.6 Avontuur product size and quality ...... 56 Table 5.7 Avontuur AMC Production Case ...... 62 Table 6.1 Exploration Coal: Australian tenements and summary of geology and valuation factors ...... 65 Table 6.2 Exploration Coal Australia: Resources and Reserves summary ...... 69 Table 6.3 Exploration Coal: Preliminary appraisal of potential environmental constraints on exploration tenements ...... 72 For personal use only use personal For Table 6.4 Exploration Coal: Method 1 – Resource yardstick estimated values ...... 73 Table 6.5 Exploration Coal: Method 2 – Resource yardstick estimated values ...... 74 Table 6.6 Exploration Coal: Method 3 – past expenditure method estimated value ranges ...... 75 Table 6.7 Exploration Coal: AMC valuation ranges and preferred values ...... 76 Table 6.8 Thabazimbi: Meletse Mineral Resources as at 30 June 2013 ...... 78 Table 6.9 Thabazimbi mine plan – key aspects ...... 80
amcconsultants.com viii
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 6.10 Thabazimbi Expected Value case ...... 83
Figures Figure 2.1 Eagle Downs location ...... 3 Figure 4.1 WPIOP location ...... 35 Figure 4.2 WPIOP: location of tenements and Mineral Resources ...... 36 Figure 4.3 WPIOP geological section through a typical CID deposit ...... 37 Figure 5.1 Avontuur: location of manganese deposits ...... 51 Figure 5.2 Avontuur: Gravenhage mineralization interpretation ...... 53 Figure 5.3 Avontuur overall plant layout ...... 57 Figure 6.1 Coal Exploration: Bowen and Surat Basin coal districts ...... 64 Figure 6.2 Thabazimbi Iron Ore Project tenement location ...... 77 Figure 6.3 Thabazimbi: Oblique view looking south-west showing hematite lodes ...... 78 Figure 6.4 Thabazimbi Iron Ore Project exploration targets ...... 79
Appendices Appendix A List of abbreviations Appendix B Report contributors Appendix C Exploration Valuation methods Appendix D Coal exploration comparable transactions Appendix E Iron ore exploration comparable transactions Appendix F Western Australian iron ore tenement list Appendix G South African tenement list
For personal use only use personal For
amcconsultants.com ix
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
1 Mineral assets 1.1 Projects Aquila Resources Limited (Aquila) is based in Western Australia and reports interests in a portfolio of mineral assets comprising coal, iron ore, and manganese projects: Eagle Downs hard coking coal project (Eagle Downs) – 50% interest: - Located in the Bowen Basin, Queensland. - The Eagle Downs Definitive Feasibility Study (Eagle Downs DFS) was completed in May 2011. - Longwall underground coal mine. - Currently in development. - Construction scheduled for completion in the first half of calendar 2017. - Planned run-of-mine (ROM) coal production averages 4.5 Mtpa over the first ten years of full production, with production up to 8.5 Mtpa if a second longwall is installed. - Mine life potentially more than 40 years. - Initial capital cost estimated at $1.6B Washpool hard coking coal project (Washpool) – 100% interest: - Located in the Bowen Basin, Queensland. - The Washpool Definitive Feasibility Study (Washpool DFS) was completed in September 2011. - The Washpool Supplementary Study (Washpool SS) to that Washpool DFS was undertaken in May 2014. - Proposed open pit coal mine based on a study at 2.9 Mtpa of product for 15 years. West Pilbara Iron Ore Project (WPIOP) – 50% interest in the API Joint Venture: - The WPIOP Feasibility Study (WPIOP FS 2010) for the first stage of the project (Stage 1) was completed in July 2010 and cost estimates were updated in October 2012 (referred to in this report as WPIOP FS 2012). - The Hardey Pre-feasibility Study (Hardey PFS) for the second stage of the project (Stage 2) was completed April 2011. - Proposed staged project comprising a greenfield mine, rail (282 km) and port (Anketell) development. - Existing Stage 1 plan based on open pit production of 30 Mtpa of direct shipping ore, with potential for expansion to 40 Mtpa to 50 Mtpa. - Initial capital cost estimated at $7.4B. Avontuur Manganese project (Avontuur) – 74% interest: - Located in the Northern Cape province of South Africa. - Production of 1.5 Mtpa of manganese product. - The Avontuur Definitive Feasibility Study (Avontuur DFS) was completed in November 2011, followed by an update of the Mineral Resource (2013) and certain mine planning aspects (2014). - Open pit production of 1.5 Mtpa of manganese product, with subsequent underground operation. Exploration projects (various interests): - Coking and hard coking coal projects in the Bowen Basin, Queensland. - PCI coal projects in the Bowen Basin, Queensland. - Thermal coal projects in the Surat Basin, Queensland. - Iron ore projects in the Northern Cape Province, South Africa. - Iron ore projects in the Pilbara, Western Australia. For personal use only use personal For - Thabazimbi iron ore project in Limpopo Province, South Africa
1.2 Principal sources of information Aquila has provided AMC with information for the purpose of preparing this report.
At Aquila’s request, due to commercial sensitivity concerning joint venture agreements, AMC has not, in this report, presented a list of principal documents used by AMC. Aquila has, however, provided AMC with sufficient
amcconsultants.com 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
relevant information for the purpose of preparing this report. AMC has kept a record of documents used in the preparation of this report.
Publicly available information The Bidder’s Statement. Aquila June 2012 Annual Report and June 2013 Annual Report. Aquila December 2013 Half Yearly report. Aquila March 2014, December 2013, and September 2013 Quarterly Reports. Aquila press releases, public announcements, and other public filings by Aquila, and media and analyst presentation material available on Aquila’s website. Brokers’ reports and recent press articles on Aquila and the coking coal, iron ore and manganese industries. Sharemarket data and related information on Australian and international listed companies engaged in the coking coal, iron ore and manganese industries and on acquisitions of companies and businesses in these industries. Information relating to the Australian and international coking coal, iron ore and manganese industries including supply/demand forecasts and regulatory decisions and pronouncements (as appropriate).
Non public information provided by Aquila Studies and other technical information relating to Aquila’s mineral assets. Detailed cash flow models including projections for Aquila’s projects. Other documents, presentations and working papers.
AMC has not audited the information provided by Aquila. AMC has, however, reviewed the information to the extent necessary to satisfy itself that the Production Cases presented in this report are based on reasonable grounds and assumptions, and that the information AMC has in relation to the valuation of the exploration properties, is sufficient.
1.3 Standing of tenements Lists of material tenements are included later in this ITSR.
Clause 67 of the VALMIN Code states that: "The status of Tenements is Material and requires disclosure. Determination of the status of Tenements is necessary and must be based on a recent independent inquiry, either by the Expert or a Specialist or on a recent report by either a solicitor or a tenement specialist…”
Accordingly, Aquila has provided AMC with independent reports on the standing of the tenements as follows: Queensland: AMC has reviewed the Preliminary Tenement Status Report, dated 5 June 2014, by Hetherington Exploration & Mining Title Services (QLD) Pty Ltd (HEMTS QLD) referred to in this ITSR as the QLD Independent Tenement Report. While the QLD Independent Tenement Report states not all the required information for a full tenement status report was available, it concludes that “regardless of this issue, the results of this report and the review to date indicate that the tenements appear to be in good standing”. Western Australia: AMC has reviewed the Preliminary Tenement Status Report, dated 5 June 2014 and 9 June 2014, by HEMTS QLD referred to in this ITSR as the WA Independent Tenement Report. The conclusion of the WA Independent Tenement Report is “The inclusions of this report are that the tenements in question appear to be in good standing with no apparent outstanding matters…” South Africa: AMC has reviewed the Tenement Status Report, dated 5 June 1014, by Webber Wentzel For personal use only use personal For in its capacity as legal counsel to Aquila, referred to in this ITSR as the South African Independent Tenement Report. The findings presented indicate that the tenements "..are in good standing".
Accordingly, AMC has prepared this ITSR on the basis that the tenements are in good standing.
amcconsultants.com 2
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2 Eagle Downs 2.1 Location Eagle Downs is located south of Moranbah, in the north-central part of the Bowen Basin, Central Queensland, as shown in Figure 2.1. The mine will target the Moranbah Coal Measures adjacent to and down dip from the BHP Billiton Mitsubishi Alliance (BMA) Peak Downs mine.
Figure 2.1 Eagle Downs location
2.2 Geology and mineralization 2.2.1 Regional geology Three successive sets of coal measures of late Permian age are present in this part of the basin being, from the top downwards, the Rangal Coal Measures, Fort Cooper Coal Measures, and Moranbah Coal Measures. In places, barren strata of the overlying Triassic Rewan Formation are present.
only use personal For The Rangal Coal Measures contain coal seams which can produce coking, PCI or thermal coal, depending on their composition and on their history since deposition. The Fort Cooper Coal Measures contain seams which often incorporate many stone bands, and which commonly include disseminated mineral matter within the coal which cannot be washed out. The Moranbah Coal Measures contain hard coking coal in the west; in the east the rank of coal increases and coking properties decrease. Regional strike is north-north-west/south-south-east, and the general dip is eastwards. Regional reverse faults occur, aligned sub-parallel to the general strike of strata and commonly upthrown to the east, and are more prominent towards the eastern parts of the basin.
amcconsultants.com 3
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2.2.2 Local geology Target coal seams at Eagle Downs lie within the Moranbah Coal Measures. Throughout the Mining Lease (ML), the Moranbah Coal Measures are overlain by Fort Cooper Coal Measures. Coal seams of the Rangal Coal Measures are present only in the far north-east. Coal seams in the Fort Cooper Coal Measures are dirty and are not the target of mining. The upper seams of the Moranbah Coal Measures are excluded from current mining plans as being too thin or too dirty, although one of them, the Q Seam, was considered in earlier proposals. The lower seams of the Moranbah Coal Measures being, in downward sequence, the Harrow Creek Upper (HCU), Harrow Creek Lower (HCL), and Dysart (DY) Seams, are the seams targeted for mining. Interseam intervals between HCU and HCL, and between HCL and DY, are commonly in the range 50 m to 65 m. In the far south, HCU dips steeply to meet HCL and they combine; mining is not contemplated for this area. Eagle Downs is located directly east of BMA's Peak Downs mine, which produces premium hard coking coal from the Moranbah Coal Measures. Minimum depth to targeted coal at Eagle Downs is about 250 m, and maximum depth about 740 m. Because of a doming of strata in the central western part of Eagle Downs, the general dip in the north- west is north-westerly, that in the south is south-easterly, and that in the east is north-easterly. Dips average about 6º, except in the vicinity of significant faults. Regional faulting aligned north-north-west/south-south-east breaks up the mineable area at depth in the east. Other faults, of which the most significant are aligned north-easterly, have been identified; one in the north will limit mining operations there, and others occur in the south.
2.3 Coal Resources The most recent Eagle Downs Coal Resource statement was made in January 2011. It is included in the Definitive Feasibility Study (DFS), and is the basis of subsequent mine planning. The Coal Resource was estimated by experienced consultants. At the time of estimation it complied with the requirements for reporting under the 2004 JORC Code4, and is also in accordance with the Australian Guidelines for Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves (March 2003)5.
The Coal Resource is based on a core drilling grid which is for the most part 500 m square (up to 700 m spacing in downdip areas), taking into account structures identified through drilling and seismic surveys. Zones of resource confidence are concentric, based in the central west. Much of the area is categorized as Measured Resources, with an outer ring of Indicated Resources. Inferred Resources are present only in the far east and north, beyond the area proposed for mining. Spacing of 500 m for Points of Observation is at the outer limit of the range for Measured Resources which is commonly used in coal exploration. At Eagle Downs, no significant discrepancies of strata correlation are expected, but detailed fault definition will require additional work. Eagle Downs management is aware of this, and more drilling for fault definition and some stratigraphic infill is scheduled in the short-term budget. The Coal Resource estimate includes those resources which were later converted to Coal Reserves The Coal Resources statement is summarized by seam in Table 2.1:
For personal use only use personal For
4 Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, The JORC Code 2004 Edition, Effective December 2004, Prepared by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia (JORC) 5 Australian Guidelines for Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves 2003 Edition, prepared by the Coalfields Geology Council of New South Wales and the Queensland Mining Council.
amcconsultants.com 4
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 2.1 Eagle Downs Coal Resources by seam as at January 2011
Seam Classification Measured Indicated Inferred Total (Mt) (Mt) (Mt) (Mt) Q 73 20 15 108 HCU 123 36 31 189 HCL 281 70 49 400 HCL PCI quality (at depth, high rank) 0 3 8 11 DY 164 13 16 193 DY PCI quality (at depth, high rank) 7 30 22 58 Total 648 171 140 959 Note: These Coal Resources are reported inclusive of those resources converted to Coal Reserves.
2.4 Exploration and resource development Initial scout exploration of the area dates back to the 1960s. Rangal Coal Measures in the far north-east were investigated in the past, but form no part of current development plans. Exploration for the Moranbah Coal Measures at Eagle Downs has been ongoing during the last two decades, and particularly from 2005. Geological field procedures were competent and systematic. Most boreholes were geophysically logged soon after drilling, to acquire both geological and geotechnical information. The database for geological modelling contains information from about 215 boreholes. Seams at the majority of drill sites on the 500 m square grid were cored. Points of observation for structural and coal quality modelling are from cored boreholes located mainly on the 500 m square grid. Early two-dimensional (2D) seismic surveys were subsequently incorporated into modelling which was based on later three-dimensional (3D) seismic surveying. High resolution dynamite 2D surveying was then used to improve modelling in the vicinity of some faults. The seismic consultants have stated that faulting with displacements of 4 m to 9 m is still possible in some areas where the coverage is not detailed. No more seismic work is budgeted for in the near future, but some fault definition and general infill drilling is budgeted. One immediate target for this drilling is better resolution of the cross-faulting which limits the 200 Series longwall panels in the north. Comprehensive geotechnical information has been collected systematically from exploration boreholes from early in the involvement of Aquila at Eagle Downs. Collection and interpretation of this information, and its practical application to proposed mining, has been supervised by experienced consultants. The emphasis has been on structural discontinuities, jointing, stress regime, and permeability. Some holes were continuously cored through the Moranbah Coal Measures specifically to acquire geotechnical information for interseam strata. In other holes, up to 8 m of geotechnical data for the roof and up to 2 m of geotechnical data for the floor were acquired by coring around each seam.
2.5 Coal Reserves The Eagle Downs Coal Reserve, reported in accordance with the 2004 JORC Code, as at 31 March 2011, is summarized in Table 2.2: Table 2.2 Eagle Downs Coal Reserve as at 31 March 2011
Seam Classification
Proved Probable Total For personal use only use personal For (Mt) (Mt) (Mt) HCU 60.1 13.5 73.6 HCL 91.1 21.9 113.0 DY 55.4 12.1 67.5 Total 206.6 47.5 254.1
amcconsultants.com 5
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The Coal Reserve is based on assumed longwall mining heights of: - HCU – 3.25 m to 4.5 m from seam floor, leaving a coal roof. - HCL – about 3.5 m from seam floor, augmented by 80% of the top coal (which has thickness between 3.5 m and 6.75 m). - DY – about 3.5 m from seam floor, augmented by 70% of the top coal (which has thickness between 0.5 m and 2.0 m). The Coal Reserve includes dependence on longwall top coal caving (LTCC) in HCL and DY. In AMC’s opinion, the efficiency of LTCC in recovering the thick top section of coal in HCL has uncertainties, and therefore AMC considered that it is possible that LTCC may not be used in DY. Some adjustment to the Coal Reserve is feasible if future mine development drilling identifies more difficulties associated with faulting.
2.6 Production scenarios AMC considered two production scenarios. Those scenarios are based, firstly, on a one longwall operation and, secondly, on a two longwall operation. They have been adopted by AMC as the basis of its Production Cases for Eagle Downs and are referred to in this report as Production Case 1 and Production Case 2 respectively.
In Production Case 1, the One Longwall Scenario, one longwall unit will be deployed in succession in the three target coal seams, being HCU, HCL, and DY.
In Production Case 2, the Two Longwall Scenario, production will commence as soon as is practicable by the deployment of a second longwall unit in the next coal seam. The assumption is that an upper seam will be mined first to allow the second longwall unit to be deployed in the lower seam under the same area where the seam above has already been mined.
AMC prepared its Production Case 1 and Production Case 2 according to its review of the geology, geotechnical constraints, target seams’ parameters, proposed mining horizons, longwall panel geometry, gas and ventilation requirements, depth of cover, and other variables as provided by Aquila. AMC also reviewed the feasibility study work done to date as part of its consideration of development and longwall equipment performance rates, and expected operating time available for production.
In forming its views, AMC compared forecast performance as provided by Aquila with actual data from operating collieries in the Bowen Basin, given the conditions under which mining is expected to take place. AMC also considered the implications of performance reported for LTCC operations elsewhere, because the experience of this type of mining in the Bowen Basin is limited. AMC’s key conclusions in relation to the production scenarios provided by Aquila are: Comparison with the schedules of other similar underground mines constructed in recent years indicates that the time allowed to commence production might be optimistic. The internal resources for management of the construction project’s specification, tender invitation and adjudication, and construction are not sufficient to enable Aquila’s construction programme to be met. The rate of ramp-up in output scheduled for longwall production from the HCU appears to be optimistic. The rate of ramp-up in output when introducing the relative new (for the Bowen Basin) mining method of LTCC in the HCL seam also appears to be optimistic. There are no issues with the annual production estimates for the mine when it has reached a steady state condition.
On the basis of the above conclusions, and for valuation purposes, AMC has allowed for a delay in production start-up by six months in its Production Case 1 and Production Case 2 relative to the production scenarios provided by Aquila, and also for initial ramp-up to occur over three to four years rather than over the two years allowedonly use personal For in the production scenarios provided by Aquila.
2.7 Mining operations 2.7.1 Conditions impacting on mining AMC concludes from its review of the Eagle Downs DFS and other information provided by Aquila indicates that the following important parameters and variables impacting on productivity, operating cost and capital expenditure have been thoroughly considered in the mine planning for Eagle Downs:
amcconsultants.com 6
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Seam characteristics, including parameters of target seams, depth of cover, thickness variability, and seam dip. Geology and geotechnical constraints, structural definition, frequency of geological structures, stress magnitude and direction, cleat and joint orientation, proposed strata support. Proposed mining horizons, cut heights, roof and floor strengths. Longwall panel geometry, panel lengths, cross grade variability and panel grades. Coal seams gas content, permeability, geothermal gradients and spontaneous combustion proneness. Hydrology parameters.
The impact of the above and other variables will be discussed in general for development and longwall mining and in particular how it may impact on performance and hence cost/capital in the three target seams.
2.7.2 Mine design and scheduling strategies To determine optimum recovery, minimize fault impact and maximize longwall performance (including macro aspects such as panel lengths and longwall panel orientation), consideration has been given by Aquila to the following: Seam height averages ranges from 4 m to 8 m. Depth of cover ranges from approximately 300 m to 700 m. All seams dip north-north-east and to the north and south of the central axis of the resource. Nominated development height of 3.5 m for HCU, HCL and DY seams. Development orientation in HCL and DY seams in relation to the total seam height to allow for optimum LTCC. Development horizon and profiles for the development roadways and cut-throughs in the light of seam dip and the impact on floor and/or roof excavations during the development cycle. Nominated 300 m longwall panels on all seams. Superimposing mains development of all three seams with pillar widths adjusted for the lowest seam and depth of cover. Gate roads orientation offset with 85 m between the three seams. Install roads and pull-off road locations of lower seams located inside those locations on the upper seams. Ventilation design requirements taking into consideration the nominated two-roadway gateroad development concept, virgin seam gas content, target gas content for mining phase and targeted heat management strategies when required. Ventilation strategy employing: - Multiple ventilation shafts allowing staged extension to deeper working horizons and to provide for targeted surface bulk air cooling. - Blind boring of at least the first intake-exhaust shaft to the DY seam. 3 - Three fans for a duty of 575 m /s at 3.5 kPa. Long-term strata stability and access/monitoring of environmental conditions of goafed upper seams while a lower seam is still being mined. Current assessment of gas management strategy (including optimum gas product utilization), following the commissioning from the first cluster of wells where data are collected and gas is flared. Pre-drainage is envisaged where the seam gas content exceeds 6 m3/t to 6.5 m3/t.
The Eagle Downs DFS developed work packages for the following underground facilities and processes:
Development equipment. For personal use only use personal For Mobile diesel equipment. Underground services including for electrical infrastructure, compressed air, mine dewatering and other logistical services. Equipment and infrastructure for ventilation, heat management, gas drainage, inertisation and others. Coal clearance including drift and trunk conveyors. Longwall equipment for the 300 m HCU seam panels with second sets for some equipment.
amcconsultants.com 7
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Twin parallel drifts are currently being constructed to access target seams at the shallowest area of the Coal Resource. This will provide access to all three seams and a dedicated coal clearance path to surface. Coal is accessed in 2016 in HCU per Aquila's development schedule.
2.7.3 Two Longwall Scenario Two sequencing options are under consideration: The One Longwall Scenario through the deployment of one longwall unit in succession in the three target coal seams – HCU, HCL and DY respectively. The Two Longwall Scenario through the deployment of a second longwall panel to allow production to commence as soon as is practicable in the next coal seam. The assumption is that an upper seam will be mined first to allow a second longwall unit to be deployed in the lower seam under the same area where the seam or seams above have already been mined.
Multiple seam longwall operations are not uncommon. At Eagle Downs, the interburden thickness and composition lends itself to utilize such a sequencing schedule. The interburden thickness between HCU and HCL is at least 50 m and between HCL and DY at least 80 m.
A second ventilation shaft had been provided for in the project budget to be able to implement the Two Longwall Scenario (AMC Production Case 2) comprising a staged development to bring longwall mining in the HCL and DY seams forward. Capital and operating cost schedules have been adjusted accordingly.
Under AMC Production Case 2, the mine life will reduce from 48 in Production Case 1 to 28 years Longwall production is scheduled in HCU from 2017, and development work from 2019 in HCL and from 2021 in DY.
Outbye coal clearance systems are often the bottleneck for existing mines to improve output with new equipment replacements. AMC is of the opinion that any shared conveyor needs to be designed to carry 8,000 tph to handle peak flows from two high-seam longwall panels to prevent the shearers from being restricted to slower cutting speeds. AMC considers that the Eagle Downs drift conveyor capacity may be a risk to projected annual output for the Two Longwall Scenario.
2.7.4 Development 2.7.4.1 Development equipment The Eagle Downs DFS indicates that formulation of the design specifications for mine development was thorough, with the following main features: Safety considerations including access, dust, people/machine interaction, isolation, temporary roof and rib support. Integrated materials handling system on continuous miners. Single pass continuous miners with four roof and two rib automatic bolters. Simultaneous cutting/loading and bolting cycles for continuous miners. Integral continuous miner on-board ventilation system. Functional shuttle cars, and feeder breakers, auxiliary fans, electrical systems.
2.7.4.2 Development productivity The Eagle Downs DFS indicates that thorough technical analysis was done to quantify the output performance of continuous miners to be used for board and pillar main development and chain road longwall developments. In the context of prevailing geology and geotechnical conditions, the Eagle Downs development panels will be support constrained (as opposed to being transport constrained in a more favourable environment). Support requirements at Eagle Downs will be higher than those experienced by the top-tier mines in the Bowen Basin, suggestingonly use personal For that high quality engineering and fully optioned equipment will be required to achieve output that will match those of the top performers. AMC expects this issue can be managed operationally.
Current operating collieries achieve in the range of 60 to 85 operating hours per week in continuous miner panels as determined by AMC in a recent study. A common target for improvement projects at existing collieries for operating hours in a longwall development panel (typical two-heading chain road development with 100 m x 35 m pillar centres) are 85 hours per week. For Eagle Downs, development operating rates were evaluated from first principles in the Eagle Downs DFS, starting with calendar time of 168 hours per week. Allowing for
amcconsultants.com 8
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
operational delays and maintenance requirements, the theoretical average for the project was calculated at 78 operating hours per week. This is within the range experienced at Bowen Basin mines.
Effective development rates for continuous cut/load and bolt miners were calculated by AMC for various support densities after discounting for other variables, with these development rates being in line with current actual performance at the top tier Bowen Basin collieries. Those rates are commensurate with AMC’s Production Cases referred to later in this ITSR.
2.7.5 Longwall mining Three distinct longwall areas have been targeted in the HCU seam, referred to as the 100, 200 and 300 series panels. An outcome from the Eagle Downs DFS investigations following a study of each seam’s individual requirements was the proposal to choose a 300 m conventional longwall mining system for the HCU seam and 300 m LTCC panels for the thicker HCL and DY seams. The production sequence requires the mining of an upper seam before total extraction of a lower lying seam.
2.7.5.1 Longwall productivity Longwall faces in Australia have a large range of annual production rates. The production rate and consequent unit operating costs of longwall panels is influenced by factors such as: Production equipment reliability, coal clearance systems, and reliability of main or trunk conveyors and power supply. Production equipment capacity, seam height, shear depth, and the limitation of the outbye coal clearance system. Panel design, size of the longwall block (both length and width), strata support requirements and seam height or volume of coal extracted per metre of retreat, also influenced by variables such as strata conditions and the presence of ground water. The quality of the management operating system.
Current operating collieries achieve in the range of 65 to 90 operating hours per week for longwall panels. A common target for improvement projects at existing collieries for operating hours in a longwall panel are 100 hours per week. This target is rarely achieved. Equipment reliability will directly impact on operating availability and the maintainability designed into equipment cannot be over stressed. The Eagle Downs DFS schedules a base of 84 longwall operating hours per week which falls in the upper end of what is currently achieved in Australia. This is discounted to deliver an average of 78 operating hours per week for various factors such as: Influences due to depth of cover. Cross grade magnitude. Panel gradient variance. Mining through projected structure zones.
Eagle Downs has less favourable operating conditions than the top performers. However, it has the benefit of design intelligence gained during recent years with respect to automation and equipment health checks to eliminate almost all unplanned sub-assembly change outs through condition monitoring.
To achieve the high-end reliability and utilization as scheduled in the Eagle Downs DFS, a well-defined and formulated management operating system will be required.
2.7.5.2 Longwall mining equipment Equipment design for longwall mining involved the review, analysis and research of physical parameters and constraints of critical elements as referred to above. In determining the longwall equipment required to deliver
the design capacity, the following were considered in the Eagle Downs DFS: For personal use only use personal For Safety considerations including machine/people interaction, manual handling, shearer man down function and isolation, equipment access, face spall, walkway clearance, protection from high pressure hydraulic systems, dust scrubbers and sprays, noise, proximity systems. Roof support requirements. Allowance for LTCC.
amcconsultants.com 9
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Double-ended ranging arm shearer capable of operating in severe cross grades, fitted with state of the art controls and communication, TG lump breaker, dust suppression, floor cleaning capability to allow bidirectional shear cycles. Armoured face conveyor; soft start drives with load sharing, volumetric capacity to suit short-term peaks. Beam stage loading (BSL) capacity, raceway; crushing; steering; side shift, and levelling capabilities. Services equipment base specifications were provided for the emulsion pump station and distribution arrangements. Monorail specifications were not, however, considered.
2.7.5.3 Longwall top coal caving LTCC is planned for the higher HCL and DY seams. This mining method had been in use for several decades in seam heights ranging from 6 m to 9 m, which is beyond the scope of single pass longwall mining. Current high capacity single pass longwall practice, worldwide, is restricted to height ranges of 4.5 m to 5.5 m. Although a number of faces have the capacity to operate at 5.5 and above, they are typically working at lower heights due to operational reasons associated with ground control problems. These geotechnical factors, together with logistical issues associated with size, weight and stability concerns with the very large, high face equipment, are considered to be major limitations to this method finding application beyond 6 m heights.
Introduced in France, and further refined in China, top coal caving uses a modified longwall mining system. Significant developments and impressive performance improvements have been achieved in China with the development and application of the LTCC method in the past 20 years. The Chinese industry had reported averages of 15,000 t/day to 20,000 t/day from a LTCC face; up to 75% recovery of over 8 m+ thick seams using a 3 m operating height longwall; and over 5 Mtpa face production. There were reported to be over 70 LTCC faces in China in 2005. In 2001, a new semi-automated 300m long LTCC face was installed at the Xinglongzhuang Colliery of the Yankuang Group, in Shandong Province, with reported production capacities of at least 7 Mtpa.
AMC is aware of three mines in Australia that have introduced LTCC, in the Bowen Basin and Hunter Valley: Yancoal Australia Ltd (Yancoal) reports that it introduced the LTCC mining technology to Australia at its Austar mine in 2006. That introduction is a collaborative effort between Chinese, German and Australian engineers. Yancoal’s major shareholder, Yanzhou Coal Mining Company, is acknowledged as being one of the safest and most productive users of the technique. The company holds patent rights to the design in China and Australia. Austar's longwall equipment was manufactured under licence by Deutsche Bergbau Technik GmbH. Peabody Energy has reported commissioning of LTCC at its North Goonyella mine. It is reported that the BMA is introducing LTCC at its Broadmeadow mine.
Although AMC is not aware of public reports on ramp-up and productivity from the Australian mines that have introduced LTCC, AMC considers that it is reasonable to expect that it will take significant time for ramp-up and to achieve the ultimate production levels planned, as is often the case when introducing new technology.
2.7.6 Capital expenditure – mining The mining capital cost estimate for Eagle Downs, as presented in the Eagle Downs DFS and subsequent cost- saving work, has been reviewed by AMC.
The order of magnitude capital provisions for specific comparable items appears to be in line with those of recent projects with which AMC is familiar.
The front end loading of engineering work had been done in detail for Eagle Downs and the market had been
testedonly use personal For for estimates, providing a reasonable level of confidence in the mining capital expenditure estimates.
Reductions in the mining capital cost estimate have recently been proposed for the project based on updates or refinements to the design and schedule. Those reductions are in the areas of gas drainage, mine buildings, site services, development equipment, ventilation shafts, and longwall equipment.
Overall, AMC considers the mining capital cost estimates as provided by Aquila to reflect the above and to be reasonable, and has adopted them as the basis for its Production Case 1 and Production Case 2.
amcconsultants.com 10
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Eagle Downs is currently retendering for the following equipment to seek more competitive quotes, and this might represent an opportunity for further reductions in estimated capital expenditure: Development. Mobile diesels. Ventilation, inertisation, and gas drainage. Underground electrical and mechanical infrastructure. Underground coal clearance. Longwall.
2.7.7 Operating cost – mining Mining operating cost estimates as provided by Aquila and reviewed by AMC. These estimates lie within the range AMC expects for projects such as Eagle Downs and, therefore, AMC has adopted them for its Production Case 1 and Production Case 2.
2.8 Quality 2.8.1 General observations AMC’s general observations regarding coal quality for the HCU, HCL and DY seams are: The base geological and quality data was obtained from several discrete exploration programmes. Subsequent programmes supported the original interpretations with minimal variance. The data sets demonstrate consistency. The level of exploration data available is sufficient to provide confidence in forming conclusions on yield and potential product quality. Variations in quality and yield occur between the seams and also to a lesser extent within the individual seams. The variation between seams warrants a differentiation of product qualities. All three seams are described as either low volatile (LV) or low to medium volatile high rank coking coals. AMC considers the assessments of product specifications by seam are reasonably based.
2.8.2 Yield Studies which include comprehensive assessments of all datasets on yield have been completed by reputable organizations. The latest of these is included in the Eagle Downs DFS and refers to and incorporates information from all previous studies. The study includes allowances for dilution and efficiency factors in the evaluation of yield and plant performance. AMC considers the assessment of product yield appears reasonable.
AMC considers that there are three quality parameters of note: Total Moisture: A final product total moisture requirements has not been specified. The estimated plant product moisture is 11.5%. Coke Strength after Reaction (CSR): CSR is an important parameter in assessing comparative values. The value for coke strength properties utilized in the specification of product quality is particularly reliant on results from one set of recent pilot scale coke oven tests completed at the Australian Laboratory Services (ALS) facilities. AMC considers that the existing dataset is minimal for such an important parameter. The average of CSR results from previous tests is lower than those from the pilot scale tests. This difference may be attributed to testing procedures using heavy liquids, sample size, time taken to complete tests, and possible influence of geological anomalies. Coke Oven Wall pressure results have not been included in the specification. The recent laboratory results do not represent all seams and are from "Box Charge" coking tests. The operating conditions for these tests are uncertain and it is recognized by laboratories that under certain operating conditions the
For personal use only use personal For results of "Box Charge" tests are indicative only in predicting oven wall pressure in production scale ovens. The HCL and DY seams being high in vitrinite and at the higher end of the rank spectrum for coking coals may exhibit oven wall pressures unacceptable in some markets. Similar coals, such as Norwich Park, have been traded around the world including Europe and Asian countries. However Norwich Park coals were generally excluded from the Japanese market due to elevated oven wall pressure.
amcconsultants.com 11
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2.8.3 Classification Classifications have been assigned to seams in a consulting report on coal quality and marketing (2011) as follows: HCU – mid-tier standard hard coking coal. HCL – mid-tier standard hard coking coal. DY – top-tier standard hard coking coal.
AMC compared the classifications of the HCU, HCL and DY seams with the Platts Methodology and Specification Guide for Metallurgical Coal. The Platts guide is generally accepted and widely adopted and applied in considering prices by both producers and buyers in the coking coal market.
The 2011 quality and marketing review also qualifies its classification around the plastic properties and pointed to the possible influence on the market acceptability attributed to possibly elevated oven wall pressure, particularly for the HCL and DY seams.
2.8.4 Summary The seam classifications which generally determine price are reasonably consistent between the 2011 quality and marketing review and AMC's views. Classifications are a guide only and vary between both customer groups and individual customers. The products' oven wall pressure may be unattractive to some markets. Important coking parameters adopted require further confirmation as they are based on a minimal dataset.
2.9 Metallurgy and processing operations 2.9.1 Coal plant design The CHPP has been designed to produce a single hard-coking-coal product. The preparation plant section of the Eagle Downs DFS was completed in April 2011 by a consultant. The Eagle Downs coal handling and preparation plant (CHPP) was designed for a throughput rate of 1,200 tph. The expected performance of the plant by product type was reviewed by AMC. Subsequent studies have updated yields and the yields of 68% (HCU), 53% (HCL) and 57% (DY) have been used in the AMC Production Case.
Specialists have conducted testwork and analyses consistent with a definitive feasibility study and the resultant design appears reasonable and in line with other comparable operations in the Bowen Basin and the metallurgical coal industry.
2.9.2 Coal plant arrangements AMC considers the following CHPP arrangements as presented in the Eagle Downs DFS to be appropriate: Plant feed sizing and ROM storage. De-sliming circuit. Dense medium circuit. Fines circuit. Ultra-fine flotation circuit. Ultra-fine product coal dewatering. Reject handling. Product handling and train load out.
Expected plant performance. For personal use only use personal For
The CHPP has been designed to operate at 1,200 tph and deliver an average annual production of 6.9 Mtpa. Annual production is governed by feed rate (nominally 1,200 tph) and operating hours. With an overall operating time of 7,000 hours per year, the plant has a theoretical annual capacity of 8.4 Mtpa. However, AMC considers that the assumptions for CHPP operating hours used in the Eagle Downs DFS are conservative, and represent an opportunity for the plant to exceed the designed annual throughput capacity.
amcconsultants.com 12
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2.9.3 Capital expenditure – processing Capital expenditure estimates for Eagle Downs DFS were built up from actual equipment quotes, contractor bids, and current rates for services and labour at the time the study was conducted in 2011. Those estimates were competitive in the market at that time, and reasonable for a plant of Eagle Downs designed capacity.
AMC understands that there is an intention to reopen the bidding process for the CHPP as it is felt that the construction market has softened considerably in Queensland, and that the overall capital cost of the project could be reduced by as much as 25%. While such significant reductions may be possible, no new 2014 contracts have been let, and the reality of the backwardation in the Queensland construction industry has yet to be proved. Therefore, in its Production Case 1, AMC has adopted a 15% reduction to estimates of CHPP and surface infrastructure capital cost. In AMC’s Production Case 2, a second CHPP module is added. The second CHPP module is added without discount.
2.9.4 Operating cost – processing Operating cost estimate for the CHPP is comparable to the average published equivalent CHPP cost for comparable Australian operations of $6.39/product tonne (published) loaded on the train. Power, water, labour, and consumables usage rates and cost estimates have been built up from first principles and the methodology used appears sound.
2.10 Infrastructure and services 2.10.1.1 Power A new switching station linked to the Moranbah-to-Dysart transmission line has recently been constructed on the Eagle Downs site, on the south-west lease boundary. The power transfer capacity is in accordance with the connection and access agreement already in place between Eagle Downs and Powerlink.
Actual power unit cost has not yet been negotiated.
2.10.1.2 Water Water supply remains in question. At the time of the Eagle Downs DFS, Eagle Downs was a foundation customer of SunWater’s Connors River Dam and Pipeline Project. This guaranteed access to 1,800 MLpa for the project. On 7 July 2012, SunWater announced that it was discontinuing work on the Connors River Dam and Pipelines project due to uncertainty in approval and timing of major coal projects in the Bowen and Galilee Basins.
Eagle Downs senior managers advise that they expect that SunWater will manage water supply to the region such that declared projects like Eagle Downs will receive reliable water supply as requested. This has been the case in the past, but some risk remains for the project due to the lack of contracted certainty in supply.
Nominal average water usage for the plant has been calculated at 138 m3/h which will consume 966 MLpa, which is well within the guaranteed access of 1,800 MLpa.
2.11 Port and rail Eagle Downs has 1.6 Mtpa of port capacity under a Take or Pay contract in Stage 1 of the Wiggins Island Coal Export Terminal (WICET) at Gladstone and has reached agreement with WICET.
The access and rail transport operating cost estimates provided for Eagle Downs are considered by AMC to be reasonable at this stage, given the tendering and negotiation processes understood to have been undertaken to date. Similarly, the port access charges for WICET are understood by AMC to have been agreed following considerable industry consultation and negotiation. As such, these are also considered to be reasonable for inclusiononly use personal For in the cost models.
2.12 Environmental and community issues The scope of the environmental review has considered Eagle Downs (Mining Lease ML 70389) as a project in development, and Eagle Downs South (Mineral Development Licence MDLa 519) as an exploration target.
amcconsultants.com 13
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2.12.1 Existing environmental values and liabilities Key observations regarding the existing environmental values and liabilities include: ML 70389: - The dominant existing land use on the ML area was grazing, with the Norwich Park rail line, a 132 kV transmission line and a water pipeline traversing the ML area. - The EIS did not identify any contaminated land on site (despite the presence of the rail line). - The ML area contains areas mapped as Strategic Cropping Land and Endangered Regional Ecosystems and Threatened Ecological Communities, protected under Queensland and Commonwealth legislation. - The ML area contains small (first and second order) drainage lines. The area is almost entirely free of the 100 year average recurrence interval flood. Shallow and deeper groundwater resources are typically low or variable yield, and brackish or saline. MDLa 519: - The MDLa area contains areas mapped Endangered Regional Ecosystems and Threatened Ecological Communities, protected under Queensland and Commonwealth legislation. - The MDLa area is traversed by first, second and third order drainage lines which comprise Ripplestone Creek. Flood mapping was not available in the MDLa area. Groundwater resources per ML 70389. - Presence of contaminated land uncertain, but unlikely to be a significant issue (given dominant land use is grazing).
In summary, there are few, if any, significant existing environmental liabilities for ML 70389 and MDLa 519, owing to the historical and ongoing land use of cattle grazing.
2.12.2 Approvals status and key issues The current approvals status and key issues include: ML 70389: - ML70389 has been granted, Environmental Authority MIN100643807 has been issued and Commonwealth environmental approval (EPBC 2008/3945) has been provided. These are significant and valuable accomplishments, providing overall authority to conduct the project (subject to various conditions). - Native title, cultural heritage, and compensation to the underlying landowner have been dealt with through the mining lease grant and EIS process. Aquila advises that land compensation has been paid in full, and that this is a component of the project capital cost. - A water licence under the Water Act 2000 for taking water from groundwater systems was obtained and expires 31 December 2014. - A class exemption has been obtained for Eagle Downs project under the Nature Conservation Act 1982 – which is an approval with standard conditions. It is understood that there are no further outstanding major environmental approvals. - The EIS Assessment Report and Environmental Authority for the project note a large number of continuing data gaps. Data collection and impact assessment and management programmes have been conditioned for implementation as part of the project’s development and implementation. - Future amendments to the Environmental Authority may need to consider the mapped Strategic Cropping Land and endangered Regional Ecosystems, which could represent constraints to future surface-based expansion and/or extended approvals process time and costs. MDLa 519: - The MDLa is currently under application. A draft letter of grant has been issued, and the offer has For personal use only use personal For been accepted by Aquila Coal Pty Ltd and Bowen Central Coal Pty Ltd. The timing for grant of the MDL is considered to be imminent, and likely to be within 12 months.
amcconsultants.com 14
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2.12.3 Environmental compliance issues and cost estimates ML 70389: A number of environmental monitoring and management plans are required as conditions of the Environmental Authority for ML 70389. The plans and commitments, and consideration of likely costs and cost model allowances, are discussed below: - Receiving Environment Monitoring Programme. Preparation of the plan, capital cost of monitoring equipment, and recurrent cost of laboratory analyses and reporting. It is assumed by AMC that this is covered in the HSEC allowance in the cost model. - Mine Water Management Plan. Involves preparation of plan, costs of pumps, pipes, drainage lines and dams, recurrent annual dam compliance costs and energy costs. Surface water management and infrastructure costs are considered in the cost model. These estimates appear reasonable. - Groundwater Management Plan (and background groundwater monitoring). Baseline monitoring costs including construction of monitoring wells, preparation of the plan and ongoing monitoring costs. The cost of plan preparation and baseline monitoring could be in the order of $1,000,000. A line item was not identified (by AMC) in the cost model. Ongoing goaf dewatering costs were considered in the cost model. Ongoing HSEC allowances are expected to cover routine monitoring. - Waste Management Plan. Preparation of the plan, estimates for solid waste management infrastructure, and recurrent waste contract costs. Non-mining waste management allowances are included in the Aquila cost model and appear reasonable. - Weed Management Plan. Preparation of the plan, estimates for weed management infrastructure and recurrent costs. It is assumed these costs are covered in the Aquila cost model HSEC allowances and general labour hire allowances. - Rehabilitation Management and Monitoring Plans. Aquila’s cost model included an allowance for life-of-mine rehabilitation costs. Preliminary calculations by AMC using the NSW DPI-MR Rehabilitation Cost Calculation Tool V1.12 provided a rehabilitation estimate. AMC considers that these estimates are within margins of error, and accordingly, that the existing rehabilitation allowance is reasonable. - Post closure management plan. Costs included in the Rehabilitation Management and Monitoring Plan costs estimates. - Federal Environmental Offsets. The proposed Biodiversity Offsets Management Plans received commonwealth approval on 6 January 2014. The cost for implementation of this plan is included in the model. - Queensland Environmental Offsets. The Queensland offsets strategy and plan has not yet been put in place. MDLa519: - The MDLa area contains areas mapped as Endangered Regional Ecosystems. Disturbance requires approval and development of offsets, which are generally onerous, costly, and extend the timeline of approvals processes.
2.12.4 Mine closure, rehabilitation and financial assurance ML 70389 - The current Financial Assurance (2013-2014 Plan of Ops) was calculated and it is assumed by AMC that this sum has been deposited, or a bank guarantee is in place. - Financial assurance estimates for mine closure have been considered in the Eagle Downs DFS cost model. MDLa 519 - The proposed work programme includes drilling to 2 km and 1 km grids, and seismic work. The
For personal use only use personal For Financial Assurance (November 2012 – first year of grant) estimate for the MDLa area is included.
2.12.5 Workforce accommodation and community context The nearest town to Eagle Downs is Moranbah. Moranbah is surrounded by numerous coal mines, and is affected, both positively and adversely, by the various aspects of coal mining operations. In the last few years a number of issues (such as community services and infrastructure, accommodation supply, demand and costs) have been very topical in Moranbah.
amcconsultants.com 15
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The proposed approach for the project is to accommodate the (420 to 570 person) workforce on site in work camps (residential dwellings, single persons quarters etc.) and assistance to employees wishing to rent or buy in Moranbah township.
In the context of Moranbah, this would appear to be a sensible approach. The Environmental Authority conditions require the project to cooperate and participate with the community environmental liaison committee in respect of the project or the wider community.
2.12.6 Summary of environmental considerations The acquisition of environmental and mining tenure approvals for Eagle Downs represents a significant milestone and represents approximately five years of environmental and approvals work.
The single largest environmental issue is the calculation of environmental financial assurance/mine closure and rehabilitation costs. This would be in the form of a bank guarantee, or cash deposit, and would be a real cost at the end of the mine life.
2.13 AMC Production Cases AMC has developed two Production Cases for Eagle Downs; Production Case 1 and Production Case 2. The Production Cases are projections of mining and processing tonnages, grades, products, and costs. The Production Cases are provided to Grant Samuel for the consideration of value. AMC has prepared its Production Cases for Eagle Downs based on the information provided by Aquila.
The Eagle Downs DFS was completed in 2011. Construction of the project began in 2013, with early work now completed on mine access (box cut excavation, portal arch installation and drift excavation). AMC’s Production Case 1 is based on the single longwall production scenario considered by the Eagle Downs DFS, and work subsequently completed for that scenario, and provided by Aquila.
Preceding the Eagle Downs DFS, and during the Eagle Downs Pre-feasibility Study (Eagle Downs PFS) the potential to simultaneously operate two longwalls and bring forward production at Eagle Downs was identified. AMC’s Production Case 2 is based on concurrently mining a second longwall from 2020.
For valuation purposes, relative to the Eagle Downs DFS and the Eagle Downs PFS production scenarios, AMC has delayed the completion of project construction by 6 months, and reduced the rate of production ramp-up.
At Aquila’s request, due to commercial sensitivity with joint venture agreements, AMC has not presented tables to support the Production Cases. AMC confirms that sufficient relevant information has been made available to AMC in preparation for the Production Cases.
Physicals and costs, on a 100% ownership basis, are:
2.13.1 Eagle Downs Production Case 1 AMC’s Production Case 1 is summarized as: A single longwall production scenario. Construction of the project commenced in 2013. Completion of project construction at the end of the June 2017. Sale of first products in April 2016. Mining and processing of 259 Mt of ROM ore tonnes, which is comprised of 98% Ore Reserves. Rail to the WICET port.
Sale of 151 Mt of coal product. For personal use only use personal For Product moisture content of 11.5%. Development capital expenditure of $2,231M. Sustaining capital expenditure of $1,274M. Operating costs of $88.70/t of product (which includes allowance for mine rehabilitation and closure).
amcconsultants.com 16
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
2.13.2 Eagle Downs Production Case 2 AMC’s Eagle Downs Production Case 2 is summarized as: A twin longwall production scenario. Construction of the project commenced in 2013. Completion of project construction at the end of the June 2017. Sale of first products in April 2016. Mining and processing of 258.7 Mt of ROM ore tonnes, which is comprised of 98% Ore Reserves. Rail to WICET port. Sale of 151 Mt of coal product. Product moisture content of 11.5%. Development capital expenditure of $2,554M. Sustaining capital expenditure of $1,274M. Operating costs of $81.20/t of product (which includes allowance for mine rehabilitation and closure).
2.14 Key risks and opportunities AMC assesses the risks and opportunities for Eagle Downs as follows.
2.14.1.1 Risks Technology: LTCC is relatively new technology for Australia and may take time to develop the design and operating expertise required to deliver the project production and costs as scheduled. Operating conditions: Localized steep panel gradients might have adverse effects on productivity. Project delivery: Front end loading of engineering design is planned for several deliverables. A large number of major capital purchases are scheduled for the period August 2014 to December 2015 and that will place pressure on the project team members. Construction: There is significant mine development and construction work that is scheduled for the 18 month period ending December 2015; there is a risk that the scheduled start-up date might not be met. Gas drainage: HCU permeability to be modelled and may impact on gas drainage requirements. Faulting: seismic consultants have stated that that there is a risk that faulting displacements might be greater than allowed for to date. This matter will be addressed in upcoming budgeted exploration drilling. Additional faulting might have adverse effects on mine planning and Coal Reserves. Mining not proven: Longwall specifications include for automation, LTCC, and mining down to 700m depth – all new concepts for the Bowen Basin. Annual production rate: AMC considers that the Eagle Downs drift conveyor capacity may be a risk to projected annual output for the Two Longwall Scenario. The HCL and DY seams, being high in vitrinite and at the higher end of the rank spectrum for coking coals, might exhibit oven wall pressures unattractive to some markets. There is a lack of contracted certainty in water supply.
2.14.1.2 Opportunities Through design and operational improvement, reduce longwall development requirements, for example: - Eliminate face install companion roads by providing raise bore ventilation roads inbye install face. - Develop part of the inbye targeted gate roads as single entries. - Make use of ventilation raise bore holes mid panel and at the back of longwall install roads. - Install strata support as a secondary process if development becomes support constrained, thereby For personal use only use personal For improving the development cycle efficiency. Shorten longwall relocation time delays: - Obtain spare shearers to do overhauls without impacting on relocation periods. - Use specialized relocation crews. - Use relocation crews for secondary support and road works to shorten relocation times. - Lease relocation mobile equipment when required.
amcconsultants.com 17
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
- Have a second set of some or all of the longwall equipment for pre-install. Virgin gas content for first few panels might not require extensive drainage, thereby reducing costs. The current competitive market conditions, which are favourable for reduction in tendered contract prices, might not be fully reflected in the cost estimates for the project. Coal seam gas: studies are progressing to examine the opportunity to commercialize gas resources at
Eagle Downs. For personal use only use personal For
amcconsultants.com 18
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3 Washpool Hard Coking Coal 3.1 Location and background The Washpool coal deposit is covered by a Mining Lease Application (MLa), number MLa80164. It is located north-west of Blackwater in Central Queensland, between the Curragh coal mine in the east and the Ensham coal mine in the west.
3.2 Geology and mineralization 3.2.1 Regional geology The Washpool project is located in the central Bowen Basin on an area known as the Comet Ridge, which is broadly anticlinal and which plunges gently to the south. Strata of Late Permian age subcrop. The sequence from the top downwards is: - Rangal Coal Measures, containing relatively clean coal seams. - Burngrove Formation, containing dirtier coal seams with common stone bands. - Fairhill Formation, containing dirtier coal seams with common stone bands. - Macmillan Formation, containing marine sediments. - Crocker Formation, containing mainly marine sediments. - German Creek Formation, containing poorly developed coals at depths in excess of 600 m. The Permian strata are commonly overlain by flat-lying Tertiary sediments. Quaternary alluvium is present along the valleys of the main watercourses.
3.2.2 Local geology The mines to the east and west of Washpool are developed within the Rangal Coal Measures. The Washpool deposit is located on the subcrop area of the Burngrove Formation. Gentle flexuring has created a shallow local basin, in which the Scorpio and underlying Centaur coal seams subcrop around the edges and reach a maximum depth of about 70 m in the centre. The coal deposit occupies an area about 6 km long west/east and about 3 km wide north/south. Dips are 3º to 5º in the east, steeper in the west, and flat in the centre. Cenozoic sediments with a thickness which averages about 22 m overlie the Burngrove Formation. In the middle of the deposit, poorly consolidated sediments reach a maximum thickness of 48 m. The Scorpio Seam is subdivided into five plies (A to E in downward sequence) which are separated by stone bands; total thickness of the seam averages 6.6 m, of which 4.6 m consists of coal plies. The Centaur Seam is close below the Scorpio and contains a coal ply referred to as F. Each coal ply in both seams is further subdivided. The coal plies and their subdivisions are identified consistently across the deposit with the aid of down hole geophysical logging. Thicknesses of most coal plies lie in the range 0.3 m to 1.0 m. The coal seams have very good coking properties, despite their high ash contents. Minor faulting was intersected in just two boreholes. No igneous intrusion was encountered.
3.3 Mineral Resources Aquila’s Washpool Coal Resource statement of July 2011 (refer Table 3.1) complies with 2004 JORC Code guidelines. 147 boreholes were used to construct the lithology and structure model. Maximum spacings of Points of Observation for the lithological model were 600 m for Measured Resources, 1200 m for Indicated
For personal use only use personal For Resources, and 4000 m for Inferred Resources. Maximum spacings of Points of Observation for the quality model were 1200 m for Measured Resources, 2100 m for Indicated Resources, and 4200 m for Inferred Resources, following advice from a geostatistical consultant. This 2011 Coal Resource estimate includes Coal Resources which were converted to Coal Reserves in the Coal Reserve estimate of 2010. The Coal Reserve estimate was based on a Coal Resource estimate from earlier in 2010. No revision of Coal Reserves was made following the revision of Coal Resources in 2011.
amcconsultants.com 19
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 3.1 Washpool Coal Resources as at July 2011
Seam Classification Measured Indicated Inferred Total (Mt) (Mt) (Mt) (Mt) Washpool hard coking coal 124.9 9.7 62.1 196.7
Aquila’s Coal Resource statement of July 2011 included a brief review of geology, exploration and modelling which was undertaken by an independent geological consultant, which endorsed the work that had been done. AMC supports this assessment.
3.4 Exploration and resource development Drilling for structural control across the whole deposit is basically on a grid pattern 500 m square, with quality data at approximately 1 km x 1 km spacing. Some close drilling to locate the limits of oxidation has taken place around the subcrops of the seams. Most boreholes have been geophysically logged for detailed stratigraphic correlation. Hydrology has been investigated with the installation of piezometers. The Mackenzie River and tributaries to the west of the project area are unlikely to be base flow supported from Washpool. A factual geotechnical report, authored by consultants, is dated October 2011. It deals with testing related to pit stability, waste reactivity, and use of overburden materials in civil works.
3.5 Ore Reserves The Coal Reserve statement in the Washpool data room predates the Coal Resource statement of July 2011. Coal plies with the highest ash contents were excluded from ROM tonnage. Almost all the Coal Resources on which the Coal Reserves were based were classified as Measured. Coal Reserves are reported as: - ROM coal (overall ash content 42.6%): Proved 94.7 Mt, Probable 13.5 Mt. - Marketable coal: Proved 34.1 Mt, Probable 5.0 Mt.
3.6 Production scenario 3.6.1 Option proposal A Washpool DFS was completed in September 2011. A Supplementary Study (Washpool SS) to that was undertaken in May 2014. These studies are at an accuracy level of ±10% to ±15% per the DFS and +25% to -20%. The preferred SS Option 2 was used as the project production model to determine: Production forecast. Capital cost. Operating cost.
A recognized mining consultancy completed the Washpool DFS, which comprehensively considered the mining aspects. The same mining consultancy further reviewed the mining options, including an update of the Washpool SS Option 2 production schedule with the following objectives: Examine ways in which the mine could be developed to defer the capital costs of building a levee bank. Review the benefits of mining the coal under Coal Mine Lagoon versus installing a diversion channel and associated levee.
For personal use only use personal For Incorporate the findings of the yield optimization study (YOS). Review the mining methodology to examine ways in which costs could be reduced and equipment deferred. Incorporate additional drilling conducted in 2011 into the geological structural and quality models.
The update of the Washpool SS addressed the above.
amcconsultants.com 20
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3.6.2 Preferred production schedule The Washpool SS Option 2 maintains the assumption of the project being a contract operation. The preferred option is for an owner's team to maintain control of the site and employ a Tier 2 contractor to undertake mining and processing operations. Table 3.2 is a summary of the physicals used to calculate the operating cost and capital expenditure in the cost model.
As part of a study to review equipment capability and other assumptions, it was confirmed that the volumes reflected in Table 3.2 are achievable with the selected equipment and operating hours used in the cost model.
3.7 Mining operations 3.7.1 Key mining outcomes of the Washpool SS The pit is extended to the west adjacent to Coal Mine Lagoon and overall coal recovery will be maximized by locating the haul road along the 144 mRL line. The 144 mRL line is the 1 in 2000 year design flood level for the mine. This will allow for a general reduction in overall levee requirements with staged construction in Years 6 and 9.
Full recovery of coal beneath Coal Mine Lagoon is possible, but was not considered in the Washpool SS. A cost effective diversion could allow this coal to be economically mined, but is not included in AMC’s Production Case for Washpool.
The Washpool SS considered a cost efficient option for the levee, based on the diversion channel for Coal Mine Lagoon being significantly reduced by leaving the northern 1 km of this watercourse intact and providing a diversion channel for only the southern 1.7 km. A relatively small quantity of coal will be sterilized in the northern section of the resource. Further evaluation of the benefits of mining the coal under Coal Mine Lagoon is required in the future to determine if the costs of creating the diversion are justified. The first stage of the diversion and levee is not required until Year 6, which provides adequate time to carry out hydrological studies and detailed design and obtain necessary approvals to undertake such work.
Two schedule options were developed that both factored in the additional 4.1% yield, staged development of the levee and excluded coal beneath Coal Mine Lagoon: Option 1: staged ramp-up of production over the first two years of mine operations, initially producing 1.6 Mtpa in Years 1 and 2, then stepping up to 2.9 Mtpa from Year 3 onwards. Option 2: moving to full production of 2.9 Mtpa in Year 1, following completion of construction.
Additional drilling in 2011 resulted in the YOS reduction of overall waste and coal uncovered, while the product coal increased with an additional yield of 4.1%.
For personal use only use personal For
amcconsultants.com 21
Aquila – Independent Technical Specialist's Report Grant Samuel & AssociatesFor Pty Ltd personal use only 214034
Table 3.2 Washpool Schedule SS Option 2 schedule summary
Schedule Option 2 Unit Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Yea r 17 Total Disturbed Area Ha 53 127 159 152 140 134 140 123 111 114 113 120 106 63 33 - - 1688 Topsoil Volume Mbcm 0.16 0.38 0.48 0.46 0.42 0.4 0.42 0.37 0.33 0.34 0.34 0.36 0.32 0.19 0.09 - - 5.06 Blasted volume Mbcm 1.55 12.25 12.6 16.04 19.05 21.54 24.49 25.42 28.59 28.64 28.95 19.67 25.16 25.05 5.94 - - 294.94 Cast Prime Volume Mbcm 0.04 1.02 1.25 1.88 2.69 3.44 4.17 4.72 5.47 5.98 5.67 3.62 4.72 4.63 0.75 - - 50.05 Cast Prime Ratio % 2 8 10 12 14 16 17 19 19 21 20 18 19 18 13 - - 17 Truck-Excavator Tertiary Waste Volume Mbcm 9.3 24.8 31.7 31.4 30.4 29 28.2 26.8 25.8 25.7 26.4 30.2 28.4 17.4 8.5 - - 374 Permian Waste Volume Mbcm 1.2 5.3 4.6 4.9 5.7 6.6 7.7 8.8 10.4 10.6 10.5 6.7 8.1 7.7 1.7 - - 100.5 Total Truck-Exc Volume Mbcm 10.5 30.1 36.3 36.3 36.1 35.6 35.9 35.6 36.2 36.3 37 37 36.5 25.1 10.2 - - 474.7 Excavator Rehandle Mbcm - 0.7 0.6 0.6 0.9 1.4 1.1 1.4 0.8 0.7 - - 0.5 1.2 - - 9.7 19.6 Bulk Dozer Prime Volume Mbcm 0.3 6 6.8 9.3 10.7 11.5 12.6 11.9 12.7 12.1 12.7 9.4 12.3 12.7 3.5 - - 144.5 Rehandle Volume Mbcm - 0.1 0.1 0.2 0.3 0.4 0.4 0.4 0.5 0.4 0.4 0.3 0.4 0.5 0.1 - - 4.5 Total Volume Mbcm 0.3 6 6.9 9.5 11 11.9 13.1 12.3 12.2 12.5 13.2 9.7 12.7 13.1 3.6 - - 147.9 Loader: Parting Volume Mbcm 0.1 1.6 2.12222222.121.9221 - -26.8 Waste: Total Prime Waste Vol Mbcm 11.2 39.1 46.9 50 51.9 52.9 55.1 54.6 56.7 56.8 57.7 52.3 55.8 44.6 15.6 - - 701.2 Total Waste Vol (incl rehandle) Mbcm 11.2 39.8 47.7 50.8 53 54.7 55.5 56.4 58 57.9 58.1 52.6 56.7 46.2 15.6 - 9.7 724 Waste: Tertiary Thickness m 17 20 20 21 22 22 20 22 23 22 23 25 27 27 27 - - 22 Waste: Permiam Thicknessm 91213151521232627292724252415- -22 Coal: ROM Coal Uncovered Mt 0.9 6.13 6.56 7.72 7.37 7.19 7.72 6.8 7.5 6.9 7.8 6 7.4 7.6 2.9 - - 96.5 Coal: ROM Coal Mined Mt 0.5 5.72 6.98 7.2 7.21 7.19 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 4.1 - - 96.5 Coal: CHPP Feed Mt 0 5.72 6.98 7.2 7.21 7.19 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 4.6 - - 96.5 Coal: Overall Yield % 39.40 42.60 40.40 40.10 39.70 39.90 39.90 40.70 40.50 40.80 41.00 40.30 40.50 41.00 42.30 - - 40.60 Coal: Product Tonnes Mt 0.2 2.44 2.82 2.89 2.86 2.87 2.87 2.9 2.9 2.9 3 2.9 2.9 3 1.7 - - 39.2 Coal: Railed Mt 0 2.44 2.82 2.89 2.86 2.87 2.87 2.9 2.9 2.9 3 2.9 2.9 3 2 - - 39.2 ROM Prime Strip Ratio bcm/ROM t 224 6.8 6.7 6.9 7.2 7.4 7.6 7.6 7.9 7.9 8 7.3 7.8 6.2 3.8 - - 7.3 Product Prime Strip Ratio bcm/ROM t 57 16 16.6 17.3 18.1 18.4 19.2 18.6 19.4 19.4 19.5 18 19.1 15.1 9 - - 17.9 ROM Total Strip Ratio bcm/ROM t 22.4 7 6.8 7.1 7.4 7.6 7.9 7.8 8 8 8.1 7.3 7.9 6.4 3.8 - - 7.3 Product Total Strip Ratio bcm/ROM t 57 16.3 16.9 17.6 18.5 19 19.7 19.2 19.9 19.7 19.7 18.1 19.4 15.7 9 - - 18
amcconsultants.com 22
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3.7.2 Mine planning Washpool SS Option 2 confirms Washpool will be mined as an open pit, cast, doze and excavate operation. The main features of the Washpool mine plan are: Four pits, with up to three mined simultaneously over the life-of-mine. Minimal blasting required in removal of interburden and overburden. Selective mining of coal plies. Product coal loaded onto train carriages at loadout facility immediately adjacent to the CHPP. On-site rail transport of coal south-west to the Blackwater rail system. Washpool DFS and Washpool SS Option 2 envisage a contractor operation. Costs include contractor margins and capital recovery cost in respect of the mining fleet. The following are achieved: - ROM production of 7.2 Mtpa. - Product coal production of 2.9 Mtpa. - Faster production ramp-up (than Washpool SS Option 1 in the first three years. - Total ROM tonnage 96.5 Mt (which varies from the Ore Reserve due to exclusion of the Coal Mine Lagoon). - Total product tonnage 39.2 Mt (which varies from Ore Reserve due to exclusion of the Coal Mine Lagoon, and optimized yield). - Mine life of 15 years.
3.7.3 Mining fleet The equipment as listed in Table 3.3 was used to calculate mining volume capacity in the production schedule. The equipment is typical Tier 2 contractor equipment that is currently available in the market. A review of industry norms indicates that the productivity estimates assigned to the equipment are achievable.
Table 3.3 Washpool mining fleet
Model Type Maximum No. Average Average Mbcm Required Mbcm p.a. per machine p.a. Primary equipment RH-340 Excavator 3 24.9 8.3 Ex-3600 Excavator 1 6.7 6.7 Cat-933 Front end loader 3 1.8 0.6 Cat-793 Truck 17 – – Cat-785 Truck 10 – – TD-D11 Track-Dozer 6 9.9 1.6 Ancillary equipment TD-D10 Track-Dozer 6 – – GR-16M Grader 2 – – WT-785 Water truck 2 – – WD-854 Wheel dozer 1 – –
The LOM volumes scheduled to be moved per equipment type in the production model are listed in Table 3.4. AMC has undertaken a review of the data and assumptions and overall performance is considered to be achievable.
Table 3.4 Washpool volumes per equipment type
For personal use only use personal For Item Equipment Volume Percentage of Total (Mbcm) (%) Topsoil Scrapers 5.1 0.72 Waste Truck and Excavator 474.7 67.27 Waste Dozer 147.9 21.11 Parting Loader 26.8 3.78 Waste Cast blast 50.5 7.00
amcconsultants.com 23
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3.7.4 Mining development The project proposal is to develop an open pit mine producing 7.2 Mtpa of ROM coal. The ROM coal will be beneficiated at a dedicated CHPP to produce 2.9 Mtpa of Washpool hard coking coal (WHCC). The product will be loaded through the mine’s train loadout facilities and railed to Wiggins Island Coal Export Terminal, from where it will be exported to global customers. The following are required to set the mine up for operations: Mine development will initially involve the construction of a site access road and haul roads, power transmission, TLO and additional supporting infrastructure. Construction of CHPP, ROM and product coal stockpile areas and supporting infrastructure within a MIA located south of the mining area. Construction of a raw water dam with raw water supply from the Mackenzie River. Construction of a staged levee along the western boundary of the mining area, adjacent to a branch of the Mackenzie River, which also contains Coal Mine Lagoon. Development of a mine surface water management system involving various water management structures to divert clean water, capture and manage mine area run-off and mine pit water for reuse within the mine operations. Potential development of a temporary purpose built accommodation village on MLa 81077. Planning of mining operations utilizing open pit mining techniques with two truck and shovel mining fleets at commencement, moving to three fleets in the later development stages. First coal can be produced within two years from the start of construction.
3.7.5 Engineering procurement and construction management The project can be delivered via a mix of an engineering procurement and construction management (EPCM) methodology and managed contracts with the following features: Mining and CHPP operations done by contractors. Small owner’s team on site. Seven days a week, 24 hour operation. Even time roster. Bus in bus out (BIBO) from regional centres, Emerald and Rockhampton. Contractors to provide workforce.
Two major contracting strategies were developed in the Washpool DFS and maintained in the Washpool SS: Minimalist management approach. Tier 1 contractor capable of operating whole site required, management only required to manage contractor and administrative and commercial requirements. Tier 2 contractor approach: Separate Tier 2 mining contractor for earth moving, CHPP and drilling and blasting. Expanded role of management to include senior site executive responsibilities and medium and long term planning function.
A number of Tier 1 and Tier 2 contractors are available to fill roles. There is also the ability to consider an owner operation in order to potentially eliminate contractor margin.
3.7.6 Mining method The project site requires minimal clearing. The waste removal process requires minimal blasting, and involves the following steps: Topsoil removal using scrapers or front end loaders and trucks. Tertiary waste removal by truck-excavator or trucks-shovel. For personal use only use personal For Permian weathered rock removal by a combination of cast blasting, dozing and truck-excavator. Permian fresh rock removal by a combination of cast blasting, dozing and truck-excavator. Parting or interburden removal by truck and loader operations.
The mining process follows the following steps: Front-end loaders and small haul trucks will mine coal plies and parting/interburden bands. ROM coal will be hauled to the CHPP site and deposited on the ROM stockpile.
amcconsultants.com 24
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Coal from multiple coal plies will be blended to ensure a consistent quality feed to the CHPP. A mix of direct feed and blended ROM coal will be fed into the CHPP. The Washpool DFS and Washpool SS mine plan assume 25% of ROM coal will be direct fed into the CHPP.
3.7.7 Workforce The availability of necessary staff and equipment resources has improved considerably since the Washpool DFS was completed, with competition for contractors and experienced personnel having subsided as well. Considerable numbers of coal mine workers in Central Queensland have been made redundant in the last 12 months and mining contractors have experienced the impacts of cost reduction through a significant contraction in mining related activity. It is expected that very competitive rates may be achievable for the project.
Labour productivity has been applied to the estimated equipment service unit hours to develop operating and maintenance labour numbers. Maintenance numbers also include a maintenance ratio (labour hours per machine hour) to calculate requirements. The maintenance ratio is between 0.3 and 1.0 depending on the equipment type.
Staff and employees will be provided with on-site accommodation and BIBO service connecting the mine with Rockhampton and Emerald. A study of accommodation needs and availability in the Blackwater area as part of the social impact assessment for the Washpool EIS had been prepared. An option study for providing an accommodation solution had also been conducted. The findings include: Preferred option involves a 170 capacity miners village in Blackwater for initial stages and a mine village provider to build and/or own and operate accommodation at the Washpool site. Similar accommodation strategies have been used at other recently established mines in the area. A tender process for mine village provider will identify candidate best placed to provide the service.
Start-up operations in the area have generally not had trouble fulfilling labour requirements due to: Culture of 'move to work' being well established in Queensland mining areas. There is a ramp-up period over which required the staff compliment can be built up.
The mine site culture will, however, be important in attracting and retaining staff.
At full operation, Washpool will employ a workforce of approximate 377 full time employees as indicated in Table 3.5. Labour productivity is calculated as 17,064 ROM t/man/year or 6,931 product t/man/year.
Table 3.5 Washpool workforce per category
Labour Category Peak Staff No. Mining operators 222 Maintenance 76 Processing 31 Other 48 Total 377
3.7.8 Operating Cost – mining In consultation with a major Tier 2 contractor, labour rates were adjusted down from those estimated in the Washpool DFS, in line with existing industry rates and carried forward into the financial model. Mining operating cost estimates for the project have been developed from first principles and are driven by key activities such as topsoil removal, drill-and-blast, load-and-haul, and dozing. The mining operating costs are
For personal use only use personal For summarized in Table 3.6 which show average unit costs over the life of the project.
The mining operating unit cost as reflected in Table 3.6 provides the input to the Washpool SS Option 2 cost model and is in line with industry standards. The now-preferred SS Option 2 achieves an average reduction in operating cost of $0.66/product t as compared to the Washpool DFS.
amcconsultants.com 25
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 3.6 Washpool mining operating cost
Type Unit Unit Cost ($) Topsoil and clearing $/bcm 4.00 Total drill-and-blast $/bcm 0.73 Waste ripped $/bcm 1.82 Truck shovel : prestrip $/bcm 2.33 Truck shovel : parting $/bcm 2.89 Truck shovel : interburden $/bcm 2.33 Dozer push $/bcm 1.44 Stripping $/bcm 2.61 $/t ROM 19.35 $/t shipped 47.63 Coal mining $/t ROM 1.23 $/t shipped 12.84 Reject haulage $/t ROM 1.23 $/t shipped 3.03 Operator $/pa (including on cost) 139,750 Maintainer $/pa (including on cost) 162,500 Staff – Owner $/pa (including on cost) 190,833 Staff – Contractor $/pa (including on cost) 181,264 Total ROM mining unit cost $/ROM tonne 24.56 Average mining cost $M/pa 158 Total mining cost1 $/Product tonne 60.47 1 Total unit cost per product calculated from the overall 40.6% product yield
3.7.9 Capital Cost – mining As a contract mining operation, the costs for purchase of mining equipment are incorporated into the unit rates used for mining operating cost estimates.
3.8 Quality Washpool has good coking properties levels, however, it has a higher-than-benchmark specification ash content, and therefore requires blending with a range of lower quality, lower ash coals.
Original studies on the Washpool project focused on accepted standard practice for evaluating coal deposits. Laboratory yields of ~27% at 13% (ad) ash proved unattractive using standard industry practices for mining and coal preparation.
However the very good coking characteristics and potential to improve yield warranted further investigation. Laboratory and pilot scale studies on liberation and blending practices were undertaken. These included: Selective mining options. Liberation studies and laboratory testing. Pilot scale blend studies.
It should be stressed the following evaluation is based on laboratory scale information. These processes
have yet to be implemented in a full scale operation in the Australian coal industry. For personal use only use personal For Results of liberation test work documented in the Washpool SS of 2014 show yield increases through liberation of the middlings material of 4.2%. The theoretical laboratory yield at 15% (ad) ash is 41.5%. This appears to be a reasonable conclusion based on a review of the Preplabs raw project data.
Pilot scale test work produced a CSR of 55% versus the predicted 46%. This is a significant and encouraging outcome.
amcconsultants.com 26
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
For bulk materials, including coal, total moisture generally increases as the size distribution decreases. On a size-reduced product such as that proposed at Washpool, this may be a significant parameter for consideration.
3.8.1 Classification There is no current classification to accommodate a 15 % ash coking coal. If ash is excluded from the specifications above and adopting the Platts classification on coking properties alone (CSN 9, CSR 63) the 15% ash product would preferentially be classed a HCC 64 Mid Vol.
The 12.5% ash product may be accepted in the traded market on the same basis with standard price adjustments around ash.
Platts applies a price normalization of 1.25% of the base price for each 1% ash for coals from 9% up to 12.5% ash. Ash levels above 12.5% are not currently traded out of Australia. To establish a market for a standalone 15% ash product will require targeted marketing. The ash chemistry is benign and may assist in that negotiation.
The blending studies of the 15% ash product with typical Rangals coals demonstrate the ash reduction, with limited reduction of coking properties, generates a product that may be more readily accepted in a wider market.
The quality and marketing review report suggests a coal product will trade at a small discount to "Standard HCC Benchmark".
As a comparison, it may be possible a blend of typical Rangals coals is accepted as a HCC 64 Mid Vol. with price adjustments for ash, phosphorus and CSR. If so, the adjustment for CSR alone applied by Platts is 1% of Hard Coking Coal (Premium Low Vol) benchmark for each 1% of CSR below 60%, a minimum 5% adjustment for that coal blend. An adjusted price, when including all parameters, of 7% below the Platts HCC 64 Mid Vol benchmark is probable.
3.8.2 Summary points The coking properties of the Washpool products are attractive. Classification of standalone Washpool coal is constrained by the ash content. Blending with a typical Rangals coal produced a significantly higher CSR result than models predicted and indicates potential to make both products more widely accepted in the market and with minimal change to the price obtained. Total moisture content is not quantified. Ash characteristics are benign. The liberation process (crushing, briquetting etc as referred to later in this report) may influence product quality including total moisture, coking properties, marketability, handleability and blending. It should be stressed the above evaluation is based on laboratory scale information. These processes have not been implemented in a full scale operation in the Australian coal industry.
3.9 Metallurgy and processing operations 3.9.1 Washpool DFS Consultants conducted test work and analysis for the coal preparation plant, and infrastructure studies as part of the Washpool DFS.
For personal use only use personal For The Washpool DFS delineated a 1,060 tph feed rate plant capable of ROM throughput of 7.4 Mtpa to produce product coal of 2.6 Mtpa. This corresponds to an overall yield of 37.5%, at a product ash content of 15%.
The low yield adversely affected project economics, and the high product ash content (15% is at the maximum marketable content for hard coking coal) further exacerbated the problem as it almost certainly would mean deep discounting would be required to market the coal.
amcconsultants.com 27
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
WHCC does, however, exhibit other desirable coking coal properties including low impurity content and quite high CSN (>9).
3.9.2 Washpool SS The Washpool SS prepared by Aquila included re-examination of Washpool in an attempt to improve the economics. From a processing perspective, the Washpool SS focused on YOS and revision of surface infrastructure plans to reduce capital spend. The study quotes a yield uplift of 4.1% to produce 2.9 Mtpa of product coal from ROM feed of 7.4 Mtpa. While several versions of improvement statistics are shown, the Washpool SS was able to present an improved economic case for Washpool. Improved yield is a result of processing at finer sizes and improved rejection of non-coal material. The extra processing steps involved size reduction, reprocessing of reject streams, and briquetting of fine product coal require additional Capex which has been offset by a redesigned (and lower Capex) site layout.
The strategy of the study is aimed at synergistic blending that takes advantage of the superior coke-making characteristics of WHCC product. It was postulated that blending of high-ash, high-CSN WHCC product with a low-ash, low-CSN coal (such as one drawn from the Rangal measures) would create a coal that could be marketed advantageously as a mid-range-ash, hard coking coal that would attract only modest penalties.
Two cases were considered in the Washpool SS; a full implementation to 7.4 Mtpa (progressed in the Washpool SS and used in the AMC Production Case) and a two-stage strategy where plant to produce 3.7 Mtpa would be initially constructed, followed by a second stage to add another 3.7 Mtpa.
3.9.3 Coal preparation plant arrangement 3.9.3.1 Plant feed sizing and ROM storage The SS did not change the basic design created in the DFS, which comprises: Primary rotary breaker. Rock rejection. Secondary roll crusher. Top size to plant of 50 mm.
The front end of the CHPP is arranged as two modules, with ROM coal from the crushing circuit reporting to two feed bins of 150 t capacity that feed the dense medium circuits. Thirty minutes of surge capacity is provided by the bins.
Feed preparation screening at 1.4 mm produces a coarse fraction for dense medium separation, and fines (minus 1.4 mm) for treatment by reflux classification and flotation.
3.9.3.2 Dense medium circuit The CHPP utilizes two-stage dense medium separation; with an initial high-density separation by DMC removing coarse rejects (destoning), and a second, low-density separation in either a dense medium (DM) drum or in a conventional DMC circuit. The circuit requires a screening-and-balancing step, sending +10 mm material to the dense medium drum, -6 mm material to the DMCs, and balancing the plant by directing the (-10 mm +6 mm), swing fraction either to the drum or to the DMCs.
The circuit is significantly more complex than normal, due to the low yield of WHCC. DMCs are not ideal when treating very low yield coal, as units must be inordinately large to accommodate the high volume of underflow rejects created by the low yield. The size splitting at 10 mm and 6 mm and the use of drum separators and low-density DMCs does accomplish the separation required, but at the cost of increased
capital expenditure for more process steps, and increased complexity of operation. For personal use only use personal For Floats from the DM drums and DMCs; i.e. the product, are rinsed and drained and added to the product conveyor.
3.9.3.3 Fines circuit Sinks from the DM drums and DMCs is a middlings fraction for further processing. The steps are as follows: Sinks from DM drums and DMCs reduced in size to -6 mm using roller ring pulverizer.
amcconsultants.com 28
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Wet sizing screening/vertical shaft impactor (VSI) in closed circuit reduce size to -1.4 mm. De-sliming at 0.25 mm using hydrocyclone/sieve bend combination. Separation using RC2020 reflux classifiers. Product dewatered using hydrocyclones and fine coal centrifuges, then added to product conveyor. Rejects dewatered using high-frequency screening, then added to fine reject collecting conveyor.
The fines circuit is significantly more complex than normal. Most importantly, middlings material is deliberately reduced in size to improve yield by improving liberation of coal and reject particles. The yield is uplifted by this size reduction, but at a cost: Increased capital expenditure requirement for additional processing steps. Increased plant complexity. Material handling and possible marketing implications due to increased proportion of fines in the product. Increased free moisture content due to high ultra-fines content. Possible degradation of coking properties due to significantly finer overall product size distribution.
3.9.3.4 Ultra-fines circuit The ultra-fine circuit utilizes two-stage flotation in Jameson flotation units. Ultra-fine product is dewatered using a thickener and two HBFs while flotation tailings is dewatered using a thickener and six belt press filters. The circuit is standard and in line with current practice.
Washability test work and circuit simulation indicate that WHCC product as designed will be exceptionally fine with a correspondingly high free moisture content. Briquetting of a portion of ultra-fine product was identified as a means to improve product handleability during rail and port transportation, and as a way to reduce the free moisture content of WHCC product. Test work established that briquetting 50% of ultra-fine product (approximated 65 tph) would reduce the ultra-fine content of the product to approximately 15%, and the overall final product moisture to 15.7%.
While briquetting will be new to the Queensland coal industry, it is being used elsewhere for the purpose of ultra-fines reduction and product moisture control. Use of briquetting represents a risk to the project. Acceptance in the marketplace has yet to be demonstrated, as buyers may be wary of the form and performance of coal presented in this manner.
3.9.3.5 Reject handling Dry reject disposal using truck transportation to the mine pit area is specified. This method of disposal is standard and in line with current practice in Queensland.
3.9.3.6 Product handling and train load-out A radial stacker discharging to a 130,000 t stockpile is provided. The train loadout is designed at 3,000 tph, giving a nominal train loading time of 3.3 hours. The sizing of the stockpile is reasonable for a plant of this size. A faster train loading rate may be required which would necessitate an increase in the rate above 3,000 tph. A rate of 5,000 tph giving a nominal train loading time of two hours is quite common in the industry.
3.9.3.7 Plant performance The plant has been designed to process 7.4 Mtpa of ROM coal, and produce 2.9 Mtpa of WHCC product at a yield of 39.2%. The feed rate of the plant is 1,060 tph. Following standard design practice in Queensland, 7,000 operating hours were allowed per year which gives a throughput of 7.4 Mtpa. AMC would normally For personal use only use personal For consider an operating time of 7,000 hours to be conservative. However, in the case of the significantly more complex Washpool plant, time will be lost for increased maintenance and for operational delays and the 7,000 hour allowance is considered reasonable.
Because of the complexity of the plant, operators will require ramp-up time before targeted yields can be achieved. This has been taken into account in the AMC Production Case.
amcconsultants.com 29
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3.10 Infrastructure and services Power will be supplied by 66 kV transmission line from the Ergon Energy Bedford Weir 66 kV substation. The Washpool SS updated the power requirement to 111.7 GWh based on the revised site layout and plant configuration.
Water supply will be managed by SunWater. A number of options are discussed in the Washpool SS, and while a definitive plan is not in place, water supply does not appear to be a significant source of risk to the project. The Washpool SS states the water requirement of the project to be 1.3 MLpa, however, AMC assumes this to be 1.3 GLpa. Aquila intends to use 663 MLpa in high priority water rights potentially to be acquired along with purchase of the underlying property. infrastructure
The Washpool project team targeted reduction in the infrastructure Capex for the site as a high priority task. They were successful in reducing the overall Capex requirement from $181.9M to $132.7M. This is a 27% reduction.
The work was conducted in a thorough and systematic manner and the Washpool SS figure of $132.7M is reasonable, and been included in the AMC Production Case.
3.11 Port and rail Washpool’s proposed logistics chain consists of hauling coal via rail to Gladstone on the Blackwater system to WICET and/or R.G. Tanna Coal Terminal for export. Washpool is located immediately adjacent to the existing Blackwater rail system and the development base case proposes a purpose-built rail loop which will allow trains to take coal directly from the stockpile adjacent to the CHPP and connect to the Blackwater system at the Gregory Branch line.
Review of the documentation provided by Aquila indicates that although the capital cost of surface infrastructure, of which the rail spur and balloon loop form a part, has been reduced from $165M in the Washpool DFS to $116M in the Washpool SS, the quantities alluded to for the construction of the rail spur and balloon loop are high level, making assessment of the reasonableness of the capital construction cost estimates challenging in terms of commenting on unit rates or components. In mitigation, however, AMC notes that the majority of the rail construction will be in accordance with Queensland Rail standard drawings.
There is only one noted deviation from these drawings. This regards the detail of the capping layer, but this is considered by AMC to be a low risk from both cost and construction programme perspectives as the Washpool SS notes that the 'less conservative' capping design proposed was recently approved for installation on a different project (IR6 p36 of 52) assumed to be comparable with the proposed works for Washpool.
Notwithstanding the high level nature of the cost information provided, AMC understands that the construction costs of the proposed spur and balloon loop have been market tested by the seeking of appropriate pricing details from engineering contractors. Although no detail of this exercise or the prices received is included in the documents supplied by Aquila, AMC understands that the estimated rail construction cost estimates were derived by taking the average of the contractor costs received. Breaking down the supplied overall costs into a per km construction figure for the spur and balloon loop shows the Capex estimates for the rail spur and balloon loop can be considered at the lower end of the current reasonable industry range, although it should be noted that they could rise relatively quickly if or when market conditions improve.
Other major contributors to the overall product cost will be the imposed rail and port access charges. While these are not quoted in the documentation supplied by Aquila, AMC understands that the rail cost estimates have been the subject of extensive negotiation with a logistics provider, with provider-supplied diesel traction
For personal use only use personal For being more cost effective than alternative electric traction from another logistics provider. Consequently, construction of the rail spur and balloon loop will not include electric traction infrastructure.
The access and rail transport operating cost estimates provided for Washpool are considered by AMC to be reasonable at this stage. Similarly, the port access charges for WICET are understood by AMC to have been
6 Washpool Coal Project - Mine Infrastructure Review for the Supplementary Study (IR), December 2013
amcconsultants.com 30
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
agreed following considerable industry consultation and negotiation. As such, these are also considered to be reasonable for inclusion in the cost models.
3.12 Environmental and community issues 3.12.1 Existing environmental values and liabilities The existing environmental values and liabilities for Washpool can be summarized as: Located adjacent to the Mackenzie River and in an area subject to flooding. Located in a coal mining area, with Curragh Coal Mine and Ensham Coal Mine within approximately 20 km of the project. Groundwater resources in shallow alluvial aquifers and underlying coal measures are of moderate to poor quality, and sometimes marginally suitable for stock watering. Some strategic cropping land and predominant land use is cattle grazing on improved pastures. A livestock dip and the existing railway were identified as being potential contaminated land issues for the project. The terrestrial ecology values of the area are limited due to historical and continued disturbance. The aquatic ecology in the area included the potential for the protected Fitzroy River and White-throated Snapping Turtle to occur.
In summary, existing environmental liabilities are unlikely to be material, and environmental constraints and values of material importance to the project are the potential effects of flooding, and the need for flood protection measures, and consideration of turtle habitat within or in close proximity to the project.
3.12.2 Approvals status and key issues The status of approvals for the Washpool project can be summarized as: The EIS process for the Washpool Project has been completed. The EIS assessment report was issued in May 2012. The Environmental Management Plan (EM Plan) is expected to be lodged in the near future. Strategic Cropping Land application has been lodged, however not yet finalized and approved. Biodiversity Offsets Management Strategy has not been finalized and approved. The draft Environmental Authority for the project has not been granted. The EM Plan, Strategic Cropping Land and Offsets Management Strategy will (generally) need to be finalized and approved prior to issue of the draft Environmental Authority. A cultural heritage management plan has been finalized and registered. The co-development agreement (with the gas tenure holder) has been executed. The restricted land survey has been completed. Compensation Agreements have not been finalized, and the Supplementary Study notes that one involves significant capital commitment. The Supplementary Study makes an appropriate allowance for land acquisition. A Mining Lease (for MLa 80164) has not been granted, and remains as an application. MLa 80176 and MLa 80177 remain under application. The Washpool SS advises that with no objections, the mining leases may be granted as early as September 2014. If there are objections, Aquila advises that it expects the worst case could be December 2015. The project requires approval under the Commonwealth Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act). Approval has not been obtained. It appears likely that the project will be subject to the new water resources trigger under the EPBC Act. A Water Resources Report was provided to the Department of Environment in March 2014. There was no report of acceptance or rejection of the additional information by the Commonwealth Department of Environment. The rail spur Mining Lease application has not been made (anticipated to be submitted in Q3 2014). For personal use only use personal For The Development Application for the (remainder of the) rail spur had not been submitted (anticipated to be lodged Q4 2014). The need for Water Act 2000 approval to take groundwater is not discussed (in the Supplementary Study). Approvals for allocations and supply of surface water appear to have been obtained. Agreement with BHP Coal Pty Ltd over ML 1759 to obtain access over this tenement to enable access to a public road is not yet finalized.
amcconsultants.com 31
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
In summary, while considerable progress has been made in the approvals process, the key environmental, and land approvals have not yet been obtained.
Most of these approvals (Strategic Cropping Land, Offsets, Draft Environmental Authority, Mining Lease and EPBC Act approvals) are largely sequential and interdependent, and hence delays in any of these approvals results in an overall delay to completion of project approvals. Furthermore, the rail spur approvals processes has not substantially commenced, and could represent a risk to this aspect of the project.
Potential delays to overall project approvals remain a material issue. The Washpool SS’s estimates of Q3 2014 (best case) and December 2015 (worst case) are not unrealistic, however, further delays beyond 2015 could easily occur.
3.12.3 Environmental issues Environmental issues of relevance to the project include those typical for a coal project: Surface water impacts, groundwater impacts and flood vulnerability. A range of impact management measures are proposed. These include 6 km flood protection levee proposed designed to 2000 year ARI flood, a mine water management system and various monitoring programmes. Land disturbance and changes in land use, noise and vibration, light spill, air quality impacts, visual amenity changes. Potential for small proportion of coal rejects with acid forming potential, however, this is unlikely to be a significant issue with the implementation of routine management measures. The waste rock is essentially non-acid forming and unlikely to be an issue. Ecological issues are essentially limited to the Fitzroy River and White-throated snapping turtles, and a management plan has been agreed with the Department of Environment and Heritage Protection.
In summary, there are no environmental issues that are significantly beyond those normally dealt with by coal mining projects in Queensland.
Collectively, compliance with the likely environmental approval conditions will require potentially significant capital and operating expenditure. An annual environmental management cost allowance of $500,000 is provided in the Washpool DFS cost model. This allowance appears reasonable for general environmental management. Significant allowances have been included in the cost model to cover the costs of flood levees, the water management system and mining waste management.
3.12.4 Community issues The social impact assessment identified a number of potential issues for the project. The major issues were social impact on housing and workforce accommodation. The proponent has made commitments to ongoing engagement with various local and state government entities on these and other social and community issues.
The cost of compliance with these commitments and likely approval conditions is unknown. It is also possible that the extent and severity of some of the predicted social impacts may have been reduced by the recent downturn in coal mining.
3.12.5 Mine closure, rehabilitation and financial assurance Mine closure planning has not yet commenced.
A Final Land Use and Rehabilitation Plan (FLURP) is likely to be a condition of the Environmental Authority. Financial Assurance will also be required. The cost for implementation of the FLURP is anticipated to be
For personal use only use personal For approximately equivalent to the Financial Assurance for the project (at maximum disturbance).
A Financial Assurance/rehabilitation estimate of $43M was calculated in the Washpool DFS cost model. The estimate was based on a total disturbance of 1,688 ha and a cost rate of $25,000/ha This allowance appears to be a reasonable preliminary estimate of likely rehabilitation costs for the project.
amcconsultants.com 32
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
3.13 AMC Production Case AMC has developed a Production Case for Washpool. The Production Case is a projection of mining and processing tonnages, grades, products, and costs. The Production Case is provided to Grant Samuel for the consideration of value. AMC has prepared its Production Case for Washpool based on the information provided by Aquila.
AMC’s Production Case is based on the full-project-implementation production scenario for the Washpool SS, as it was identified (in that study) as having the greatest value.
AMC's Washpool Case is summarized in Table 3.7.
Key aspects of AMC's Washpool Case are: Commencement of project construction in July 2015. Sale of first product on 1 September 2016. Mining and processing of 96.5 Mt of ROM coal, from 108.3 Mt of Coal Reserve (a portion of Ore Reserves is not included in the current mine plan). Rail to WICET port. Sale of 39 Mt of coal product. Product moisture content of 1.2%. Capital expenditure of $349M. Sustaining capital expenditure of $23M. Operating costs of $124.50/tonne of product (including provisions for rehabilitation). Negative cash flows under the Development Capex item relate to the sale of land not utilized for mining operations.
Table 3.7 Washpool Production Case Item Unit 2014 2015 2016 2017 2018 2019 2020 2021 2022 to 2027 to Total 2026 2031 Physicals Mined ROM Production Total Mt - - 0.50 5.70 7.00 7.20 7.20 7.20 36.00 25.70 96.50 Waste Mined Mt - - 11.20 39.80 47.70 50.80 53.00 54.70 286.90 171.20 715.30 Product Tonnes Coal Production Tonnes Mt - - 0.10 2.40 2.80 2.90 2.90 2.90 14.60 10.60 39.20 Capital Costs Development Capex $M - 221 137 -10 - -4 - - 4 - 349 Sustaining Capex $M - - - 22222 8 723 Total Capital Costs $M - 221 137 -8 2 -3 2 2 12 7 372 Operating Costs Mining $M - - 36 134 161 172 175 177 906 569 2,328 Processing $M - - 3 46 57 58 59 58 296 215 793 Rail $M- - 24046474747239173641 Port $M- - 23541414039197132527 Management and administration $M - - 21 34 37 40 42 43 215 159 592 Total Operating Costs $M - - 64 289 342 358 362 364 1,853 1,249 4,881
3.14 Key risks and opportunities For personal use only use personal For AMC assesses the risks and opportunities for Washpool as follows.
3.14.1 Risks The assessment of good coking characteristics and potential to improve yield evaluation is based on laboratory scale processes. These processes have yet to be implemented in a full scale operation in the Australian coal industry. The ash content of 15% requires a partner to blend to enable the product to be sold.
amcconsultants.com 33
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Possible degradation of coking properties due to significantly finer overall product size distribution. Startup and ramp-up schedules might not be achieved. It was concluded in the Washpool SS that with no objections, the mining leases may be granted as early as September 2014. If there are objections, the worst case could be December 2015. Further delays to project approvals could easily occur. Because of the complexity of the plant, operators will require ramp-up time before targeted yields can be achieved. The low product yield is an unfavourable factor in terms of economic viability. Strip widths of 60 m can reduce productivity. The present equipment selection is more productive and safer with 100 m strip widths. The allocated 21% of volume to be dozed with only 60 m benches is questioned. Dozer quantity assumptions applied may be optimistic. Consider further assessment during detailed design stage. Modelling to be reviewed in the final mining study. The cost per bcm rate for truck and shovel excavator fleet may be achievable in the short term. Contractors have indicated that they can work for this rate in the current market conditions. This may not be sustained in the long term.
3.14.2 Opportunities There is a possibility of increasing the Coal Resource and Coal Reserve in some areas: - By detailed exploration of an area to the east of the currently proposed mine area. - By mining of the Coal Mine Lagoon area and of the Centaur seam. A redesign of the infrastructure plan might result in capital expenditure savings. There is an opportunity to substantially increase the level of direct feed coal, which will reduce rehandle costs. A cost efficient diversion could allow the coal under Coal Mine Lagoon to be economically mined.
For personal use only use personal For
amcconsultants.com 34
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4 West Pilbara Iron Ore Project 4.1 Location The WPIOP is located in the Pilbara, Western Australia, as shown in Figure 4.1.
Stage 1 of the project is based on the construction and development of eight mining areas, approximately 282 km of heavy-haul rail infrastructure and a multi-user deep-water port at Anketell Point.
The WPIOP is managed by API Management Limited (API) which is an entity held by Aquila and AMCI (IO) Pty Ltd where each party holds a 50% interest. The project includes tenements held directly by: API Joint Venture between Aquila (50%) and AMCI (IO) Pty Ltd (50%). Red Hill Iron Ore Joint Venture between API and Red Hill Iron Limited where API holds a 60% interest but can earn up to 80%. Mt Stuart Iron Ore Joint Venture with Cullen Resources Limited where API holds a 70% interest.
Figure 4.1 WPIOP location For personal use only use personal For
Source – Aquila 2013 Annual Report
amcconsultants.com 35
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.2 Geology and mineralization Tenements that constitute the WPIOP and the Mineral Resources on those tenements are shown in Figure 4.2. The Mineral Resources that constitute the two proposed stages of development of the project are also shown.
Figure 4.2 WPIOP: location of tenements and Mineral Resources
Most of the iron ore deposits that make up the WPIOP are channel iron deposits (CID) which are Tertiary alluvial deposits containing clasts eroded from iron-bearing source rocks and deposited in river channels. The Hardey and Innawalley Pool deposits are bedded iron deposits (BID) where iron enrichment of in situ banded iron formation (BIF) has occurred. The Weckl deposit at Mt Elvire is a detrital iron deposit (DID) where clasts of iron-enriched BIF form scree slopes.
CIDs are Tertiary alluvial deposits containing clasts eroded from iron-bearing source rocks and deposited in river channels. The iron-bearing source rocks are BIF of the Hamersley Group. Supergene enrichment of BIF in the Hamersley Group developed BID in the Mt Newman Member and MacLeod Member of the Marra For personal use only use personal For Mamba Iron Formation and the Dales Gorge Member of the Brockman Iron Formation. The iron enrichment developed goethite-martite deposits mined at a number of locations in the Hamersley Basin and further iron enrichment has resulted from burial metamorphism.
CIDs are derived from erosion and reconsolidation of a pre-existing early-Cainozoic duricrusted residual surface formed on outcrop of the Brockman Iron Formation. The ferruginous material was locally stripped from the upland areas and mechanically concentrated into topographic lows and palaeodrainage systems. The process occurred during episodes of high rainfall, with periods quiescence indicated deposition of clays.
amcconsultants.com 36
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The alluvial deposits (the Robe Pisolite) are mainly a clast-supported conglomerate composed of iron-rich detrital material that has undergone variable amounts of weathering and alteration. The pisolite typically contains concretions (variously known as ooids, ooliths, pisoids and pisolite) of goethite-hematite and fossilized wood cemented with iron oxide. Most of the CID forms coarse to very-coarse sandstones and granule conglomerates. The iron content of the deposits is commonly enhanced by goethite cementation.
The CIDs form partly dismembered palaeochannel deposits preserved along major palaeodrainage lines. They form resistant ridges in the present erosional environment (Figure 4.3).
Figure 4.3 WPIOP geological section through a typical CID deposit
The CID occurrences outcrop over lengths of several kilometres. They are between 30 m and 1,500 m wide and up to 80 m thick. Deposits are locally covered by alluvium.
An upper weathered layer (hardcap) normally covers higher grade pisolite. Iron grades can be highly variable due to remobilization and leaching and SiO2 and Al2O3 grades also tend to be higher and irregular due to the occurrence of clays and silicification.
The higher grade hematite-rich CID generally has a low clay content. Iron grade is often greater than 56%, SiO2 and Al2O3 are low due to iron enrichment.
The mixed CID consists of degraded pisolitic material, bedded mineralization and clay bands. It is has a high clay content (up to 40%). Discrete clay layers greater than 2 m thick can occur within the higher grade or mixed pisolite zones. An extensive mottled clay zone occurs at the base of the CID.
4.3 Mineral Resources Table 4.1 lists Mineral Resources that form the WPIOP.
Table 4.1 WPIOP Mineral Resources as at April 2013 CID deposits
Joint Venture Classification Mt Fe SiO2 AL2O3 P S Mn MgO LOI (%) % (%) (%) (%) (%) (%) (%) Mt Elvire Measured 82 57.9 5.16 3.83 0.072 0.020 0.025 0.072 7.72
Indicated 34 57.2 5.70 3.68 0.075 0.014 0.020 0.079 8.33 For personal use only use personal For Inferred 1148 55.5 7.29 3.47 0.073 0.014 0.021 0.073 9.27 Total 1264 55.7 7.11 3.50 0.073 0.014 0.022 0.073 9.15 Red Hill JV Measured 125 57.7 5.36 3.37 0.084 0.014 0.030 0.087 8.06 Indicated 285 56.4 6.22 3.83 0.071 0.019 0.030 0.100 8.68 Inferred 62 55.6 6.57 4.15 0.070 0.020 0.029 0.108 9.01 Total 472 56.6 6.03 3.75 0.074 0.018 0.030 0.098 8.56
amcconsultants.com 37
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Joint Venture Classification Mt Fe SiO2 AL2O3 P S Mn MgO LOI (%) % (%) (%) (%) (%) (%) (%) Mt Stuart JV Measured 2 55.1 6.61 3.64 0.041 0.020 0.058 0.208 9.99 Indicated 73 55.1 6.91 3.16 0.037 0.016 0.079 0.178 10.26 Inferred 23 54.6 7.53 3.10 0.037 0.015 0.102 0.209 10.40 Total 98 55.0 7.05 3.15 0.037 0.016 0.084 0.186 10.29 Yalleen Measured – – – – – – – – – Indicated 48 57.3 5.27 3.71 0.058 0.016 0.057 0.117 8.56 Inferred 36 57.1 5.28 3.81 0.061 0.015 0.056 0.109 8.56 Total 84 57.2 5.28 3.75 0.060 0.016 0.057 0.113 8.56 Note: These Mineral Resources are reported inclusive of those resources converted to Ore Reserves.
DID Deposits
Joint Venture Classification Mt Fe SiO2 AL2O3 P S Mn MgO LOI (%) % (%) (%) (%) (%) (%) (%) Mt Elvire Measured – – – – – – – – – Indicated – – – – – – – – – Inferred 101 54.4 11.94 3.60 0.080 0.021 0.025 0.050 5.76 Total 101 54.4 11.94 3.60 0.080 0.021 0.025 0.050 5.76 Note: These Mineral Resources are reported inclusive of those resources converted to Ore Reserves.
BID Deposits
Joint Venture Classification Mt Fe SiO2 AL2O3 P S Mn MgO LOI (%) % (%) (%) (%) (%) (%) (%) Hardey Measured 106 61.5 3.74 2.33 0.147 0.007 0.062 0.080 5.42 Indicated 23 60.0 4.13 2.54 0.100 0.014 0.081 0.120 6.83 Inferred 23 58.7 5.32 2.59 0.108 0.010 0.057 0.142 7.37 Total 151 60.8 4.03 2.40 0.134 0.009 0.064 0.095 5.92 Innawalley Measured – – – – – – – – – Pool Indicated – – – – – – – – – Inferred 63 58.8 3.91 4.55 0.160 0.010 0.041 0.200 6.43 Total 63 58.8 3.91 4.55 0.160 0.010 0.041 0.200 6.43 Note: These Mineral Resources are reported inclusive of those resources converted to Ore Reserves.
Mineral Resource estimates are based mainly on reverse circulation (RC) drilling with some diamond drilling completed mainly for metallurgical samples. Most RC drillholes were vertical except near the edge of mesas where access was restricted. Vertical drillholes are appropriate reflecting the flat-lying nature of the CID mineralization.
Drillhole spacing varies especially in narrow CID occurrences where drilling access was difficult to complete a regular grid. Drillhole spacing ranges from 50 m by 50 m to 100 m by 200 m which is reflected in Mineral Resource classification.
Drillhole collars were surveyed but not downhole surveyed which was reasonable given that vertical,
reasonably short RC drillholes are unlikely to deviate significantly. For personal use only use personal For
RC drillholes were mainly sampled on 2 m intervals. Samples were analyzed following standard industry protocols at a recognized commercial laboratory. Analyses were completed using X-ray fluorescent spectrometry for major elements and oxides (Fe, SiO2, Al2O3, CaO, Na2O, K2O, MgO) and significant minor elements including P, S and Mn. Loss on ignition (LOI) was also determined.
amcconsultants.com 38
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
An assay quality control protocol was in place that included certified reference materials and duplicate assays.
Density determinations were carried out on diamond drill core samples and average bulk densities and applied to estimate the Mineral Resource.
The Mineral Resource estimates were developed within grade domains interpreted at an iron cut-off grade, mostly 54% Fe but also 52% Fe or 53% Fe. The interpretations were developed into three-dimensional wireframes for the Mineral Resource estimate.
Grades have been estimated into a block model using ordinary kriging (OK) using parameters derived from studies of variography.
Mineral Resources have mainly been classified as Measured, Indicated and Inferred Resources in accordance with the 2004 JORC Code based on confidence in the geological interpretation spacing of drillholes, the number of composites and drillholes used for estimation, and the distance to composites.
AMC considers that the Mineral Resource estimates have been completed using accepted industry practice with drillhole data supported by a quality control protocol. The estimates are appropriately classified as Measured, Indicated and Inferred Resources in accordance with the JORC Code.
AMC considers that the Mineral Resource estimates have been completed using accepted industry practice with drillhole data supported by a quality control protocol. The estimates have been appropriately classified as Measured, Indicated and Inferred Resources in accordance with the 2004 JORC Code.
4.4 Ore Reserves The WPIOP Ore Reserve7, reported in accordance with the 2004 JORC Code, as at December 2010, is summarized in Table 4.2. The Ore Reserve is comprised of West Pilbara Fines 1 and 2 (WPF1, WPF2) products and this breakdown in shown in Table 4.3. WPF2 is a low grade product. The quality and reasonableness of the Ore Reserve estimate is satisfactory and is supported by feasibility-level studies.
Table 4.2 WPIOP Ore Reserve by classification as at December 2010
Classification Tonnes Fe Al203 SiO2 P L0I (Mt) (%) (%) (%) (%) (%) Proved 166 58.0 3.38 5.11 0.08 7.99 Probable 279 56.5 3.48 6.13 0.06 8.90 Total 445 57.1 3.44 5.75 0.07 8.56
Table 4.3 WPIOP Ore Reserve by product as at December 2010
Product Classification Tonnes Fe Al203 SiO2 P L0I (Mt) (%) (%) (%) (%) (%) WPF1 Proved 145 58.4 3.29 4.87 0.08 7.77 Probable 244 56.7 3.41 5.96 0.06 8.86 Total 389 57.3 3.37 5.55 0.07 8.45 WPF2 Proved 21 55.1 3.96 6.81 0.09 9.58 Probable 35 55.1 3.95 7.35 0.09 9.16 Total 56 55.1 3.95 7.15 0.09 9.31 Total Proved 166 58.0 3.37 5.11 0.08 7.99 For personal use only use personal For Probable 279 56.5 3.48 6.14 0.06 8.90 Total 445 57.1 3.44 5.75 0.07 8.56
7 2013 Aquila Resources Limited Annual Report
amcconsultants.com 39
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.5 Production scenarios AMC considered a number of production scenarios to AMC. They ranged from 30 Mdmtpa to 45 Mdmtpa. AMC prepared its Production Case 1 and Production Case 2 according to its review of the geology, geotechnical constraints, ore body geometry, scheduling and product constraints and other variables as provided by Aquila. AMC also reviewed the pre-feasibility and feasibility study work done to date as part of its consideration of performance rates.
In Production Case 1, 30 Mdmtpa of WPF1 and WPF2 is scheduled from Stage 1. They are high alumina products. Stage 1 includes Red Hill, Mt Elvire, and Mt Stuart.
Production Case 1 is based on the WPIOP FS released in July 2010, and updated in October 2012. The DS production rate is 30 Mdmtpa. The production schedule is predominantly based on the Ore Reserve, with 9% of the schedule being sourced from the Inferred Resource as shown in Table 4.4. Production Case 1 waste includes 62Mt of rehandle from WPF2.
Table 4.4 WPIOP Production Case 1 schedule – Stage 1
Material Tonnes Fe Al203 SiO2 P L0I (Mt) (%) (%) (%) (%) (%) Ore 489 56.9 3.44 5.84 0.07 8.62 Rehandle WPF2 62 57.1 3.44 5.75 0.07 8.56 Waste 620 – – – – – Strip ratio 1.27 – – – – –
Production Case 2, as prepared by AMC, is based on 35 Mdmtpa from Stage 1 and 10 Mdmtpa from Stage 2. Stage 1 inventory is as in Production Case 1. Stage 2 does not have an Ore Reserve, but has a supporting PFS at 10 Mdmtpa. The additional production inventory, relative to Production Case 1, is shown in Table 4.5. The inventory is derived from optimized pit designs and only includes material within pit designs. A total of 73% if the inventory is Measured and Indicated Resource, with 27% of the schedule being sourced from the Inferred Resource. The Stage 2 product is high phosphorous.
Table 4.5 WPIOP Production Case 2 additional schedule – Stage 2
Material Tonnes Fe Al203 SiO2 P L0I (Mt) (%) (%) (%) (%) (%) Ore 133 61.4 2.47 3.69 0.13 5.47 Waste 96 – – – – – Strip ratio 0.72 – – – – –
AMC’s key conclusions in relation to the production scenarios provided by Aquila are: The annual production rate estimates for the operations are reasonable. Stage 1 product sales show WPF1 followed by WPF2. WPF2 is extracted concurrently with WPF1, stockpiled at the deposit site and rehandled. WPF2 was added to the waste in the year of mining then rehandled at a lower cost at the end of the mine life. Project commencement of 1 July 2015 with a first sale of 2019 appears to be optimistic. An 18-month feasibility study is required for Stage 2 before project commencement.
On the basis of the above conclusions, and for valuation purposes, AMC has allowed for a delay in
For personal use only use personal For production start-up by one year in its Production Case 1 and Production Case 2 relative to the production scenarios provided by Aquila. The revised project construction start is July 2016 and the first sale of product is January 2020.
amcconsultants.com 40
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.6 Mining operations 4.6.1 Status of project WPIOP is not in production. The status of the project as reported by Aquila is and assessed by AMC is: Stage 1 – Includes Red Hill, Mt Elvire, and Mt Stuart. This is based on a feasibility study completed in 2010 (WPIOP_FS_2010) and then updated in 2012 (WPIOP_FS_2012). The update revised the mining schedule, updated the project schedule, included contract mining and a revised port layout. Stage 2 – Hardey. A PFS was completed in 2011 (Hardey PFS). Buckland Hills – An order of magnitude cost estimate has been prepared , there is no study or mine planning.
In AMC’s opinion the WPIOP_FS_2010, WPIOP_FS_2012 and Hardey PFS are to the usual industry standard with the exception of Hardey PFS geotechnical work, which is still at conceptual level.
4.6.2 Conditions impacting on mining AMC concludes from its review of the WPIOP_FS_2010, WPIOP_FS_2012, and the Hardey PFS, and other information provided by Aquila that the following important parameters and variables impacting on productivity, operating cost and capital expenditure have been thoroughly considered in the mine planning for WPIOP: Orebody characteristics. Geology, geotechnical and hydrological constraints. Proposed mining areas, bench heights and sink rates. Waste management. Proposed mining methods. Proposed blending and quality. Labour. Equipment selection.
A number of operational aspects that may materially impact on performance and cost are listed in Table 4.6. These aspects have been considered by Aquila, and items of note include: Stage 1 requires simultaneous production from several pits over a 50 km area to achieve required grade blend. Pit stages entail below water table mining, pit will require advanced dewatering and ore will require drying, and blending with dry material. Stage 1 and Stage 2 have the potential to be adversely affected by wet weather and surface flood water, and this has been allowed for. Stage 2 has areas of steep terrain, and this might slow pit establishment.
For personal use only use personal For
amcconsultants.com 41
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 4.6 WPIOP Operational features that may impact on mining performance and cost
Item Stage 1 Stage 2 Saleable Product CID, direct shipping ore (DSO) fines. DSO fines: Brockman and Whaleback Shale (92%) and High alumina. Marra Mamba (8%). High phosphorous. Mine Layout Eight shallow mesa deposits grouped in Brockman pit with 3 stages and 1 Marra Mamba pit. north, central and south areas. Over an Some steep terrain and contour mining area 50 km in length. Bench height 8 m drill-and-blast interval, 4 m bench 8 m drill-and-blast interval, 4 m bench height height Below water table 16% of Ore Reserves (two pits) 20% of in-pit iron ore Mineral Resource. Surface water course and Yes Yes flood plains Allowance for weather has been made. Allowance for weather has been made. Waste Management Dumps and pit backfill Dumps and pit backfill. No hazardous material. Some potential acid forming material. No asbestos. Scheduling method evORElution optimization software. Minemax optimization software. Blend design 6 pits on line 2 pits on line. Central blending point Central blending area and direct tip. High rehandle Material movement 35 m wide haul roads. 35m wide haul roads. 10% maximum gradient. 10% maximum gradient. 55 km haul roads. Shuttle trains used from northern and southern areas to reduce road hauls. Mining Method Conventional drill-blast and with load-and- Conventional drill-blast and load and haul haul and shuttle. Contract or owner mining Contract Owner Primary equipment 6 x 360 t Excavators 2 x 250 t Excavators 6 x Loader 12 x 135 t haul trucks 41 x 180 t haul tucks 2 x Drill rigs 6 x Drill rigs 1 x hydraulic loader
4.6.3 Mining operating and capital costs AMC considered operating cost and capital expenditure estimates. These estimates are based on detailed build up, with supplier pricing, and industry benchmarking. The mining contractor estimate for Stage 1 was estimated from first principles, with a contractor margin applied. The resulting cost estimates are considered by AMC to be reasonable, however, the Stage 1 mining operating cost estimates are at the upper end of AMC’s benchmarking data. The Stage 2 mining operating cost estimates are more in line with AMC’s benchmarking data. Contributors to higher operating costs for Stage 1 are the haulage distances, the use of shuttle trains, rehandling of waste, and rehandling of ore for blending.
4.6.4 Adjacent leases There are two operations adjacent to WPIOP’s Hardey and Buckland Hills leases. AMC considers that the opportunities could be: Hardey is adjacent to the BHP Billiton Rocklea project, which is not in operation. An unconstrained pit design that extends into the BHP Billiton lease increases the pit iron ore inventory by 16 Mt (with high iron and low alumina grades), and increases the waste inventory by 30 Mt. Accordingly, there could be an opportunity to expand the operation, or for asset sale, or joint venture. Buckland Hills is adjacent to the Iron Ore Holdings (IOH) Buckland project. The IOH Buckland project has completed a PFS, which is the basis of its 92 Mt Ore Reserve. There could be an opportunity for
an asset sale or joint venture. For personal use only use personal For 4.7 Quality – WPIOP fines The grade of the ore feed is determined by the Mineral Resources planned to be mined, and the plant is designed to crush the ore into acceptable market DSO products. No upgrading of the ore is envisaged, and therefore the product grade will be as mined. The project is envisaged as only a fines producer.
The product will be high LOI, with LOI values between 8.5% and 9.3% which gives the product a value above the face value of the %Fe. A 55%Fe product would be regarded as 60.8%Fe for the steelmaker who
amcconsultants.com 42
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
uses the sinter after the LOI has been affected. The 57%Fe material would be regarded as 62.3%Fe after removal of the LOI. This behaviour is typical of the Robe River-style goethitic deposits and is in contrast to the Indian low Fe deposits which are hematite-based and where the LOI is very low giving no significant increase in grade on sintering.
The Ore Reserve estimate by product classification is presented in Table 4.7. The major issue with the ore is the relatively high alumina at 3.37% for the Product 1 of Stage 1 and increasing to 3.96% alumina for the lower grade Product 2.
Both products have silica which is above 5% – though this is less of an issue than the alumina. The %P is slightly high relative to the normal target of 0.07%P which is less critical depending on the product range of the buyer.
Table 4.7 WPIOP Ore Reserve grades by product
Proved and Probable
% Fe % SiO2 % Al2O3 % P Product 1 57.3 5.55 3.37 0.07 Product 2 55.1 7.15 3.96 0.09
As a fines product for sinter feed, various tests have been conducted at the CSIRO and at sinter test facilities in China.
4.8 Minerals Processing 4.8.1 Description The ore has a low abrasion and low unconfined compressive strength (UCS) properties and this has determined that both the primary and secondary crushers can be sizers rather than more conventional gyratory and cone crushers.
From the secondary crusher, the ore will be screened with oversize returning to four tertiary crushers which will be closed-circuited with the screens. The aim is to produce 100% -12.5mm – the slightly coarse size designed to prevent excessive ultrafines and to compensate for the likely breakdown in transportation.
Product will be stockpiled on a series of piles for transport to the coast.
The main complication for the plant is the potential variability in feed because the iron ore is sourced from deposits spread over a 50 km range with the iron ore planned to be railed in to a Central Processing Facility (CPF) at ROM size, after being blended through stockpiles at each site. Further ore testing is required to confirm selection of equipment and flowsheet prior to detailed design.
4.8.2 Plant design AMC Production Case 1 is based on Stage 1 sourcing ore from North, Central and South mines, and the CPF operating at a throughput rate of 30 Mtpa. AMC Production Case 2 is based on expanding the Stage 1 CPF to 35 Mtpa, plus the Stage 2 development of the Hardey mine and plant, and rail extension to produce an additional 10 Mtpa, giving a total production rate of 45 Mtpa.
4.8.2.1 Stage 1 AMC has reviewed the plant arrangement for a 30 Mtpa throughput rate and notes: For personal use only use personal For There is low plant availability and excessive shut down times for a low abrasion ore. With four ore sources the supply of material should not be interrupted by problems at any one mine. Regular maintenance intervals for sizer teeth could be more frequent than the allowed six weeks. It could be as little as three to four weeks depending on ore quality. There is some mismatch in tonnages between the design tonnage of the tertiary crusher and the design of the primary system. Other than this, and concerns regarding the sizers, the equipment ratings and selections seem adequate. It is possible that a secondary sizer fed and output sizes will not meet 30 Mtpa.
amcconsultants.com 43
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Additional investigation is required for the CPF including geotechnical ground investigation test work and laboratory testing to establish ground conditions. The main utilities are power and water. Power allowed for in the design which is reasonable for the scale of plant, and water is only required for dust control rather than any specific process requirement. AMC considers that allowances for processing spares are adequate.
While noting the above, AMC considers that operating cost estimates have been estimated using accepted industry practices and appear reasonable.
4.8.2.2 Stage 2 The Hardey project will involve sourcing of approximately 20% of the plant feed from below the water table. The processing plant has, however, been designed to process dry material. Therefore, there is a risk that operational issues will result from processing wet material. Mine planning, scheduling and blending of dry and wet material can reduce the risk presented by wet material.
For the upgrade of the CPF to produce 35 Mtpa from the Stage 1 area under AMC’s Production Case 2, AMC considers a second secondary sizer facility will be required and an associated primary sizer facility, including the conveyor between the primary and secondary sizing facilities. The secondary sizing facility will have two sizers (on operation and one standby).
In general, AMC considers that the work undertaken for the Stage 1 upgrade, and the Hardey addition as referred to above, provides a reasonable basis for AMC’s Production Case 2, but there are risks to the project given the lack of flow and wear property testing of the ores, particularly the below water table feed material for Hardey. AMC considers, however, that the risk this poses to the project is adequately dealt with in the contingency allowances included in the cost estimates adopted for its Production Case 2.
4.8.3 Cost estimates – process plant The plant capital expenditure estimate provided to AMC is an escalation of 2009 data in the WPIOP FS 2010. Given the lack of complexity of the plant and its scale, AMC considers that the capital expenditure estimate for the processing plant is reasonable, based on AMC’s knowledge of capital costs for comparable facilities.
Overall, AMC considers that the plant and associated operating cost estimates have been estimated using accepted industry practices and appear reasonable.
4.9 Infrastructure and services The studies prepared for Stage 1 and Stage 2 of WPIOP are stated to be at feasibility study and pre- feasibility study levels respectively, with typical industry levels of accuracy for capital expenditure and operating cost estimates. The level of work completed for infrastructure and services appears to meet the requirements of these levels of study as set out in the study documents. The main issues are the level of materials testing (geotechnical and ore properties).
In AMC’s opinion, an implementation time of approximately 3.5 years for Stage 1 and Hardey is reasonable.
From an infrastructure viewpoint, AMC assesses the main risks as being geotechnical and the Hardey plant ability to handle wet ore if present. Overall, however, the mine, rail and port system design is appropriate and the estimated costs are in the right order for this type of development, with the following additional assessment.
4.9.1 Rail For personal use only use personal For Transport of material from mine to the CPF to port will be by rail. There are eight mines spread over a 50 km area delivering to a single central processing facility. The mines are grouped into three localities – Northern, Central and Southern. The ROM iron ore from Northern and Southern localities is rail transported to the CPF. The main rail system links spur lines from North and South ROM load outs to the CPF receival station and links the CPF product load out to the port site at Anketell Point, approximately 245 km.
The rail design prepared appears robust, with the exceptions of geotechnical investigations.
amcconsultants.com 44
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
In general, the work completed meets the minimum requirements for the studies. However, in AMC’s opinion, there are risks to the project given the limited extent of geotechnical work completed in along the rail corridor. AMC considers that the risk that this poses to the project is adequately dealt with in the contingency included in the cost estimates.
4.9.2 Port The port and marine operations include train unloader, product stockyard, and ship loading facilities.
WPIOP FS 2010 mentions the port location is a causeway that connects Anketell Point to Dixon Island and the ship loading facility is launched off Dixon Island. Subsequent port planning work considers a single causeway launched off Anketell Point. Although the geotechnical investigation is adequate for the WPIOP FS 2010, further work will be required for a single causeway launched off Anketell Point to confirm assumptions for the detailed design of that option.
The port area (offshore) has had a reasonable amount of engineering carried out, particularly the geotechnical, channel design and armour modelling works. AMC agrees with the risks identified in the WPIOP FS 2010.
In general, the work completed meets the minimum requirements for the studies. However, in AMC’s opinion, there are risks to the project given the limited extent of geotechnical work completed in the port area. AMC considers that the risks this poses to the project are adequately dealt with in the cost contingency allowances for the project.
4.10 Environmental and community issues 4.10.1 Overview The WPIOP poses numerous technical environmental management challenges, but none is considered by AMC to require management or financial inputs that by industry standards could be considered unusual or onerous. No individual issue is, of itself, likely to impede project implementation or operation but collectively, the issues demand sustained application of professional environmental management, especially in agency and community consultation, and monitoring and reporting.
The main technical challenges concern protection of flora and fauna (terrestrial, marine and subterranean), water management, and closure and rehabilitation.
A closure cost estimate has been developed by API. AMC considers that estimate, which has been included in the overall WPIOP cost estimates, to be realistic.
Crucially, the main environmental approvals under the State Environmental Protection Act (EP Act) and the federal EPBC Act have been obtained. While these approvals predictably include stringent conditions for the establishment of environmental baselines and impact-trigger thresholds, monitoring and reporting and contingency planning, those conditions are considered to be typical for a development of this scale in this region.
4.10.2 Statutory environmental approvals Based on thorough environmental impact assessment documentation prepared by API, the relevant "umbrella" approvals have been obtained from the state and federal Ministers for the Environment. As noted in section 4.12.1, no individual condition of approval is unusual or unwarrantedly onerous; collectively, however, they will require sustained professional environmental management inputs. A large number of management plans are required to be developed to the regulator’s satisfaction prior to most land-disturbing
operations. For personal use only use personal For Secondary approvals (e.g. Works Approval (to construct) and Licence (to operate)) can reasonably be expected to be obtained in a timely manner through routine liaison and consultation with the various agencies (e.g. Department of Environmental Regulation, Department of Water).
amcconsultants.com 45
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.10.3 Flora and fauna No Declared Rare Flora, Priority 1 Priority Flora Species or Threatened Ecological Communities (TECs) are likely to be impacted by the project; impacts on such species and communities would have likely demanded relocation of facilities and/or onerous requirements for impact minimization and monitoring.
Project activities will disturb areas of Triodia sp. Robe River assemblages of the Pilbara Priority Ecological Community (PEC). PECs have lower ranking than TECs, but regulators nonetheless demand all reasonable efforts to avoid and minimize impacts. Such a requirement is not considered by AMC as unusual or unwarranted.
Nine terrestrial fauna species of conservation significance have been recorded in several rigorous and targeted surveys in and around the project area. Some of these species were recorded only outside the project footprint; others are only itinerant users of the project area; some species will experience minor loss of habitat, but those losses will have no significant impact on their regional and national conservation status. Approval conditions require monitoring and reporting of impacts, especially those resulting from inadvertent trapping in trenches left open during construction. There are well established protocols for minimizing such inadvertent trapping (control of lengths of open trench, provision of escape ramps, twice-daily inspection for and removal of trapped fauna), and these protocols have been adopted for the project.
Marine fauna impacts (e.g. on dugongs, turtles, whales) during port construction can be managed by application of established protocols that have been proven effective elsewhere in the region: pre-start survey for sensitive fauna; slow start-up of piling operations; cessation of activity when sensitive species approach the work area. With careful planning and resourcing, significant impacts on marine fauna are easily avoidable.
4.10.4 Water management Surface water flows will require diversion around pits and other facilities, with associated construction of bunds and levees. These strategies are well established in the area and region and, while they can cause local ecological impacts, those impacts are unlikely to be significant when considered on a broader geographic and ecological scale.
Groundwater abstraction for mine dewatering will produce volumes in excess of water demand in various periods over the life of the project. The water is suitable for stock watering, and thus its discharge to the environment poses only minor risks of direct ecological impacts. Nonetheless, the regulators closely scrutinize plans for management of excess dewater, and demand surface discharge be a last resort strategy. An acceptable strategy has been formulated. A detailed and quantified water management plan will be required to the regulator’s satisfaction, and to monitor, report and apply contingency plans over the project life, based on trigger levels for potential impacts on subterranean fauna and groundwater-dependent ecosystems.
4.10.5 Acid and metalliferous drainage Acid-base accounting and multi-element assays have been performed on samples of ore, low-grade and waste rock at WPIOP. AMC assumes that the sampling protocol was typical of modern environmental geochemistry evaluations and accurately represented the mineralogies present in the orebody. No significant sulphur concentrations were identified, and the conclusion is drawn that no acid-forming material is likely to be encountered.
There is also no significant metal or metalloid enrichments in the samples, and the metals and metalloids present are likely to be sparingly soluble. Thus, risks of metal-enriched drainage from stockpiles are small, and metals and metalloids are most unlikely to constrain establishment and growth of vegetation on
stockpiles. For personal use only use personal For
At the Hardey deposit, pyritic McRae shales lie beneath the orebody, but the current mine plan does not intersect any of this well known acid-forming material. Additional testing is planned for the future, likely including assessment of metal enrichments and risks of near-neutral acid drainage.
amcconsultants.com 46
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.10.6 Closure and rehabilitation Closure and rehabilitation plans exist only for the mine area, on the basis that the rail and port infrastructure would be sold at the end of project life.
Generic prescriptions have been developed for landforming and revegetation of disturbed areas. These prescriptions broadly meet standards currently demanded by regulators, especially the Department of Mines and Energy.
Closure planning includes backfilling of at least some mine pits to above the pre-mining water table, to avoid the salinization of pit water, and possibly the local groundwater, that would otherwise occur through evaporation from the mined-out pits, which will become local groundwater sinks, possibly for decades, after mine dewatering ceases. This strategy reflects regulators’ sensitivity to potential diminution of groundwater with potential long-term value to other users.
The closure cost includes an allowance for post-operations closure activities. AMC independently calculated a slightly lower closure liability. The difference probably reflects the inclusion of demolition costs, which AMC considers likely to be offset, at least in part, by salvage revenue. For its Production Cases, AMC has applied the study estimate.
No single issue is considered to pose a major risk, but the complexity of the environmental-management challenge is challenging. Managing numerous environmental issues, however manageable individually, demands rigorous professional management at both a technical level and in sustained liaison and consultation with stakeholders.
AMC thus considers the planning of closure and rehabilitation to be appropriate for this stage of development, and the closure cost estimate to be realistic.
4.11 AMC Production Cases AMC has developed two Production Cases for WPIOP; Production Case 1 and Production Case 2.
The Production Cases are projections of mining and processing tonnages, grades, products, and costs. The Production Cases are provided to Grant Samuel for the consideration of value. AMC has prepared its Production Cases for WPIOP based on the information provided by Aquila.
In the WPIOP_FS_2012, engineering was undertaken for a project targeting production of 30 Mdmtpa of iron ore. AMC’s Production Case 1 is based on the outcomes of the WPIOP_FS_2012, including the forecast production of 30 Mdmtpa (WPIOP Stage 1).
In addition to the WPIOP_FS_2012, API has undertaken further engineering studies designed to increase mining, processing, rail, and port capacity to production rates of between 40 Mdmtpa and 50 Mdmtpa. In doing so, API has investigated a number of options to increase production above 30 Mdmtpa of iron ore, including: An order of magnitude (OOM) study, completed in 2013 that considered a number of different options to increase production above 30 Mdmtpa of iron ore. A Hardey PFS (Hardey is located 150 km by the proposed rail route from Stage 1), and targeting an additional production of 10 Mdmtpa. An OOM, for Buckland Hills, completed in 2012, which considered 12 Mdmtpa and 20 Mdmtpa production scenarios.
AMC has prepared its Production Case 2 for WPIOP targeting 45 Mdmtpa of iron ore product. Production
For personal use only use personal For Case 2 includes increasing production at Stage 1 from 30 Mdmtpa to 35 Mdmtpa of iron ore, and producing 10 Mdmtpa from Hardey.
At Aquila’s request, due to commercial sensitivity with joint venture agreements, AMC has not presented tables to support the Production Cases. AMC confirms that sufficient relevant information has been made available to AMC in preparation for the Production Cases.
Physicals and costs for WPIOP Case 1 and Case 2 are presented on a 100% ownership basis as follows.
amcconsultants.com 47
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
4.11.1 WPIOP Production Case 1 AMC’s WPIOP Production Case 1 is summarized as: Commencement of project construction on 1 July 2016. Sale of first product on 1 January 2020. Stage 1 mining and processing of 489 Mdmt at an average grade of 57% iron, comprising 445 Mdmt of Ore Reserves and 44 Mdmt of Inferred Mineral Resources. A fines only product. Waste mining of 683 Mdmt. Product sales of 490 Mdmt at an average grade of 57% iron. A product moisture content of 6.5%. Initial/Expansion capital expenditure of $7,437M. Sustaining capital expenditure of $296M. Operating costs of $27.56/t per tonne of product. A residual value for port and rail infrastructure of $3,448M, based on an estimated sale value of the infrastructure.
4.11.2 WPIOP Production Case 2 AMC’s WPIOP Production Case 2 is summarized as: Commencement of project construction on 1 July 2016. Sale of first products on 1 Jan 2020. Mining and processing from Stage 1 of 489 Mdmt at an average grade of 57% iron, comprising 445 Mdmt of Ore Reserves 44 Mdmt of Inferred Mineral Resources. Mining and processing from Hardey of 133 Mdmt at an average grade of 61% iron, comprising 50 Mdmt of Measured Resource, 48 Mdmt of Indicated Resource and 39 Mdmt of Inferred Resource. Waste mining of 779 Mdmt. Product sales of 623 Mdmt at an average grade of 58% iron. A fines only product. A product moisture content of 6.5%. Initial/Expansion capital expenditure of $9,226M. Sustaining capital costs of $408M. Operating costs of $25.72/tonne of product. A residual value for port and rail infrastructure of $3,572M, based on an estimated sale value of the infrastructure.
4.12 Exploration Valuation AMC has developed Production Cases for WPIOP; Case 1 and Case 2. Case 1 is supported by Mineral Resources that constitute WPIOP Stage 1, namely Red Hill Joint Venture, Mt Stuart Joint Venture and Ken’s Bore East which is part of the Mt Elvire group of deposits. The Mineral Resource for the Hardey deposit was added for Production Case 2.
AMC considers that the value of tenements not considered in the Production Cases is reflected in the value of the contained iron in Mineral Resources determined by applying a range of yardstick values.
AMC identified a number of recent transactions for tenements with iron ore Mineral Resources in the Pilbara region (Appendix E). These transactions applied to a range of deposit types, combinations of Mineral For personal use only use personal For Resource categories and stages of development. In considering ranges of yardstick values to apply to Mineral Resources not considered in the Production Cases, AMC discounted some upper and lower outlier yardstick values and separated the range into three categories to apply separately to Measured, Indicated and Inferred Resources. This analysis led to the following yardstick values being applied to Mineral Resources not considered in Production Cases: Inferred Resource: $0.25/t to $0.90/t of contained iron. Indicated Resource: $0.90/t to $1.55/t of contained iron.
amcconsultants.com 48
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Measured Resource: $1.55/t to $2.20/t of contained iron.
AMC has therefore based its valuation on the tenements listed in the WA Independent Tenement Report, and as summarized in Appendix F as being in good standing.
On this basis, tenements not considered in Production Case 1 are valued as listed in Table 4.8.
Table 4.8 WPIOP valuation of tenements not considered in Production Case 1
Deposit Group Low High Preferred ($M) ($M) ($M) DID and CID Yalleen 15 31 23 Mt Elvire 79 285 182 Mt Elvire DID 7 25 16 Hardey 58 88 73 Innawalley Pool 5 17 11 Total 164 446 305
Tenements not considered in Production Case 2 are valued as listed in Table 4.9.
Table 4.9 WPIOP valuation of tenements not considered in Production Case 2
Deposit Group Low High Preferred ($M) ($M) ($M) DID and CID Yalleen 15 31 23 Mt Elvire 79 285 182 Mt Elvire DID 7 25 16 Innawalley Pool 5 17 11 Total 106 358 232
4.13 Key risks and opportunities AMC assesses the risks and opportunities for WPIOP as follows:
4.13.1 Risks The product quality is dependent on the Ore Reserve and the high alumina levels leave little room for blending. The Al2O3 is the major issue with the project from a product quality viewpoint, though phosphorous is just within normal ranges. Blending with low alumina iron ore from a deposit such as Buckland Hills may help with an overall product blend though this will increase the %P level. Some aspects of the operating costs in the processing area appear to be missing; wear parts mainly but these are minor in the overall cost scale. Stage 1 requires mining from six of the eight pits over a 50 km area to achieve the required blend. This will require significant scheduling and management coordination, over an extended area. This poses a risk to achievement of the productivities and unit costs as forecast in the Production Cases. Stage 1 has a risk that secondary sizer might not have the capacity for production of 30 Mtpa. For Stage 2, AMC has allowed for additional capital expenditure for a second primary and secondary sizer
For personal use only use personal For facility at the CPF. The increment in production scheduled for Hardey over Stage 1 is not based on an Ore Reserve and lacks a sufficient level of geotechnical investigation to support a pre-feasibility study. Hardey is 150 km from Stage 1, and has some steep terrain which may slow mining. Stage 1 and Hardey have below-water-table ore, which requires advance pit dewatering, drying and blending to enable efficient processing. Additional geotechnical work along the rail corridor and port area is particularly required.
amcconsultants.com 49
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Dredging quantities and materials may vary significantly from those assumed for cost estimation purposes.
4.13.2 Opportunities Stage 1 may have potential for an increased production rate, without substantial additional capital expenditure. Stage 2 has the opportunity to increase inventory by expanding the Hardey pit into the adjacent BHP Billiton Rocklea lease.
Buckland Hills has the opportunity to be sold or joint ventured. For personal use only use personal For
amcconsultants.com 50
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
5 Avontuur Manganese 5.1 Location and background Avontuur consists of a single prospecting right (478 PR) that covers an area of 370 km2 located near the town of Hotazel in the Northern Cape Province of South Africa, about 500 km from Johannesburg (refer Figure 5.1). The tenement lies adjacent to the important manganese-producing region of the Kalahari Manganese Field (KMF). The tenement is held as part of the Thabazimbi Joint Venture (TJV) with Rakana Consolidated Mines Pty Ltd in which Aquila holds 74%.
Figure 5.1 Avontuur: location of manganese deposits
5.2 Geology and mineralization Manganese was first identified in the region in 1907 leading to mining in the Postmasburg area and For personal use only use personal For development of railways. Several manganese mines operate south of Avontuur including the Gloria, Mamatwan, Wessels, and Nchwaning mines. Exploration was conducted in the Avontuur area in the 1960s and 1990s and the TJV was formed in 2006 to initially explore for iron ore. High-grade manganese mineralization was intersected in drillholes in 2008. Drilling in several campaigns led to the first estimate of the Mineral Resources in 2009 and the most recent estimate in August 2013. Mineral Resource estimates were completed for separate deposits at Eersbegint in 2009 and Gravenhage South and Haakdoorn in 2012.
amcconsultants.com 51
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The southern part of the tenement covers an extension of the main KMF but north of the Haakdoorn farm the tenement covers the separate Avontuur basin which is a structural and sedimentary relict of the KMF. The stratigraphy is essentially the same as the KMF but the Hotazel Formation is generally thinner. The Avontuur Basin is structurally complex with dykes, sills, and prominent northeast trending faults.
The manganese deposits of the KMF occur within three continuous units (Upper, Middle and Lower manganese bodies) interbedded with BIF of the Hotazel Formation. The Lower manganese body is 5m to 45 m thick and is the main source of manganese mineralization. The Middle body is 1 m to 3 m thick and sub-economic. The Upper body averages 5 m in thickness.
The Hotazel Formation overlies andesitic lava of the Ongeluk Formation and is overlain by carbonate of the Mooidraai Formation. Together these form the Postmasburg Group which is folded and unconformably overlain at the Mapedi/Gamagara unconformity. The synclines are important controls on the location of manganese mineralization below the unconformity.
Manganese mineralization consists of manganite, bixbyite, braunite, hausmannite, jacobsite and hematite. Calcite, manganese-bearing calcite and barite are common accessory minerals. High-grade mineralization at Gravenhage is hausmannite-jacobsite-rich similar to that found at the Wessels mine, indicating more advanced hydrothermal alteration and virtually no carbonate minerals.
5.3 Mineral Resources Mineral Resources for Avontuur have been reported for four manganese deposits (Table 5.1) of which Gravenhage is the largest and lies at the northern edge of the tenement. The Gravenhage Mineral Resource was reported at a 34 % Mn cut-off grade and the other estimates reported at 34 % Mn cut-off grade. The Gravenhage deposit was the subject of a feasibility study completed in 2011. Since the study further drilling has been targeted at the Inferred Resource in the open pit and underground areas and all high-grade mineralization and an updated Mineral Resource (JORC 2012) was completed.
Table 5.1 Avontuur Mineral Resources as at August 2013
Location and Tonnes Manganese Classification (Mt) Grade (% Mn) Gravenhage Measured 63.9 39.16 Indicated 28.4 38.23 Inferred 19.4 36.46 Total 111.7 38.45 Gravenhage South Inferred 19.8 36.10 Haakdorn Inferred 8.4 40.77 Eersbegint Inferred 1.8 45.50 Note: These Mineral Resources are reported inclusive of those resources converted to Ore Reserves.
The Gravenhage Mineral Resource estimate is based on 333 drillholes about half of which are diamond drillholes. Other drilling consists of 100 RC drillholes and 90 open hole percussion drillholes that were mainly aimed at defining the basin edge and mafic dykes. Most drillholes are vertical to intersect the flat-lying
For personal use only use personal For stratigraphy. Drillhole spacing is between 100 m and 400 m. Drillhole collars were surveyed and a little over half the drillholes are downhole surveyed. Drill core and RC cuttings were photographed.
Drillholes were geologically logged and samples at 0.5 m intervals to geological boundaries in mineralization. Samples were prepared and analyzed at independent laboratories and assay results were supported by a quality control protocol of certified reference materials and duplicate samples. Bulk densities were determined using a weight in air/weight in water method carried out on site.
amcconsultants.com 52
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Grade estimation was controlled by an interpretation that defines the Lower manganese body and the Upper manganese body in three discontinuous parts (Figure 5.2). Known crosscutting mafic dykes are also modelled. The interpretation was based on a combination of geology and a 30% Mn cut-off grade.
Figure 5.2 Avontuur: Gravenhage mineralization interpretation
Grades8 were estimated into a block model with estimation parameters derived from a study of variography. Bulk density was estimated using inverse distance squared estimation.
The Mineral Resource estimate has been classified as Measured, Indicated, and Inferred. The classification was based on parameters that reflect confidence in the estimated grades. AMC notes that the approach to resource classification has led to a checkerboard appearance where the areas highest confidence category (Measured Resource) form isolated patches around drillholes suggesting lower confidence in continuity. Parts of the estimate classified as Measured Resource are in areas of the widest-spaced drilling suggesting lower confidence in geological continuity. However, if Measured Resource had been classified as Indicated Resource, there would be no effect on the quantum of Ore Reserve as both are considered in Ore Reserve estimation.
AMC notes that most drilling is vertical which is not optimal to identify crosscutting faults or mafic dykes. These have been incorporated in the Mineral Resource estimate to the extent possible, but it is likely that further faults and dykes will be exposed in mining, which may have implications for the proposed underground mining method.
The Gravenhage South and Haakdoorn estimates are based on an indicator method to identify the mineralized volume (in contrast to geological interpretation). Taking into account the limited number of drillholes, the Mineral Resource grade was reported based on the length-weighted mean of data within the For personal use only use personal For mineralized volume.
The Gravenhage South, Haakdoorn and Eersbegint Mineral Resource estimates are based on limited wide- spaced drilling and as a result have been classified as Inferred Resource. Data collection followed the same protocols as Gravenhage drillhole data.
8 Fe, SiO2, CaO, MgO, Al2O3, K2O, P, loss on ignition
amcconsultants.com 53
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The Eersbegint estimate was based on interpretation of the mineralized volume and grade estimation using inverse distance squared estimation.
The Gravenhage South, Haakdoorn and Eersbegint Mineral Resource estimates are appropriately classified as Inferred Resource reflecting the limited wide-spaced drilling and assumed geological continuity.
AMC considers that the Gravenhage Mineral Resource estimate has been completed using accepted industry practice with drillhole data supported by a quality control protocol.
The Gravenhage South, Haakdoorn and Eersbegint Mineral Resource estimates are based on limited wide- spaced drilling and as a result have been classified as Inferred Resource which is appropriate.
5.4 Ore Reserves The Avontuur Ore Reserve9, reported in accordance with the 2004 JORC Code, as at November 2011, is summarized in Table 5.2. The Ore Reserves is based on a combination of open pit and underground mining, methods and this breakdown is also shown in Table 5.2. AMC concludes that the Ore Reserve is supported by the Avontuur DFS, and is a reasonable estimate.
Table 5.2 Avontuur Ore Reserve as at November 2011
Product Classification Tonnes Manganese Grade (Mt) (% Mn) Open pit Proved 2.8 41.1 Probable 3.1 41.5 Total 5.9 41.3 Underground Proved 5.8 39.9 Probable 8.5 39.4 Total 14.3 39.6 Total Proved 8.6 40.3 Probable 11.6 40.0 Total 20.2 40.1
5.5 Production schedule AMC considered one production schedule for Avontuur. The basis of this schedule is the Avontuur DFS. AMC has reviewed the Avontuur DFS and its supporting documentation, and the project’s geology, and its geotechnical, ore body geometry, scheduling, and product constraints, and other variables. AMC has adapted the Avontuur DFS schedule to prepare its Production Case for Avontuur.
The Avontuur DFS proposes a 1.5 Mdmtpa ROM ore open pit operation, with subsequent underground mining by decline access from the open pit. Blending stockpiles at the mine will allow for a consistent lump and fines DSO product to be prepared for transport to domestic and international customers. The production schedule is predominantly based on the Ore Reserve, together with 11% of the schedule being sourced from the Inferred Resource, as shown in Table 5.3.
Table 5.3 Avontuur mining and plant feed
Area ROM Ore Tonnes Low Grade Tonnes Waste Tonnes Inferred Resource % of Total Plant Feed (Mt) (Mt) (Mt) (%)
For personal use only use personal For Open pit 6.6 1.02 191.12 10 Underground 16.2 – 0.83 12 Total 22.8 1.0 192.0 11
9 2013 Aquila Resources Limited Annual Report
amcconsultants.com 54
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
AMC’s key conclusions in relation to the production schedule provided by Aquila are: The annual production rate estimates for the operations are reasonable. Project construction commencement of July 2015 in the Aquila production schedule appears to be optimistic.
On the basis of the above conclusions, and for valuation purposes, AMC has allowed for a delay in production start-up by one year relative to the production schedule provided by Aquila. The revised project construction commencement is January 2016.
5.6 Mining operations 5.6.1 Status of project Avontuur is not in production. The technical status of the project as assessed by AMC is listed in Table 5.4.
Table 5.4 Avontuur technical status and assessment
Study Date Completed AMC Assessment
Avontuur_FS November 2011 Satisfactory at the time, prices and costs require an update. Avontuur_FS Update March 2014 Increased production rates require more work. Not 1.5-2.5 Mdmtpa operation suitable for mine planning. Cost updates useful. Updated with June 2013 Mineral Resource and pit Indicates upside. optimizations.
5.6.2 Conditions impacting on mining AMC concludes from its review of the Avontuur FS and other information provided by Aquila that the parameters and variables impacting on productivity, operating cost and capital expenditure have been thoroughly considered in the mine planning for Avontuur.
Key aspects of the mine plan as developed by Aquila in the November 2011 Avontuur FS are listed in Table 5.5.
Table 5.5 Avontuur mine plan – key aspects
Item Open Pit Underground Mining method Conventional truck and shovel. Mechanized room and pillar. Mine Layout One pit, 3 pushbacks, depth 190 m. 4200 m x1800 m areal extent Two declines with dedicated return airway. Working Heights Bench height 10 m. Four mining sections: Ore bench vertical advance rates acceptable. Mining section - 11 m x 8 m rooms Waste bench vertical rates acceptable except for Mining height 2 m to 5.5 m. year 5 where waste includes a 100m vertical advance which might be optimistic. Scheduling The open pit is mined first whilst underground – operations are being established. Using XPAC software. Material movement 8% ramp Truck haulage to surface. Two-lane haul roads – 25 m wide One-lane haul roads – 18.5 m wide. Contract or owner mining Contract Owner Primary equipment Ore 7 x twin boom Sandvik DD220L 2 x R984C Backhoe (4 m3) 11 x LHD Sandvik LH209L
For personal use only use personal For 6 x 50 t ore Liebherr trucks 20 x 30 t low profile trucks EJC533 Waste 7 x Roof bolters 3 x R9400 Backhoe 18 m3 4 x Charge up vehicles 2 x PC4000 18 m3 face shovel 1x FEL 600 kw 18 x 150 t waste trucks (Cat 785) Drill Rigs 102 mm DTH DX800 Pantera 165 mm DTH D25KS Drilltech 251 mm D75 or D91 Drilltech
amcconsultants.com 55
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
5.6.3 Mining operating and capital costs AMC considered operating cost and capital expenditure models as part of the Avontuur FS. These estimates are based on detailed estimates, supplier pricing, and industry benchmarking. Quotes were submitted by contractors for open pit mining only. Underground mining costs were estimated from first principles. As the Avontuur FS was completed in 2011, those cost estimates are out of date. Aquila supplied AMC with an Avontuur FS Update, produced in 2014 that includes updated open pit and underground mining operating cost estimates which are considered by AMC to be reasonable estimates of mining operating unit costs. Updated capital expenditure estimates were not provided and, therefore, AMC increased Avontuur FS (2011) capital expenditure estimates by 5%, which AMC considers to be reasonable.
5.7 Metallurgy and processing operations The process is a relatively simple crushing and screening operation to produce 1.5 Mtpa of medium manganese products. There are three product qualities of lump and a fines product (Table 5.6).
Table 5.6 Avontuur product size and quality
Product Size (mm) Lump -75 + 6 Fines 6 + 0.5 Discard -0.5
Product Grade
Lump Med/L SiO2 42.5% Mn, 10.5% Fe, 7.3% SiO2
Lump Med/Med SiO2 42.5% Mn, 10.5% Fe, 8.2% SiO2
Lump – Low/Hi SiO2 38.0% Mn, 12.7% Fe, 10.3% SiO2
Fines 38% to 48% Mn, < 14% Fe, < 12% H2O
The plant is designed to crush into the desired size range but there is no upgrading plant so grade has to be achieved by selective mining and grading.
The Avontuur FS capital expenditure estimate for the plant is ZAR156M with a claimed -5%+10% level of accuracy. Another estimate of ZAR115M, dated January 2012 was also provided. The January 2012 estimate is based on an exchange rate of US$1:ZAR8.0, compared with the current rate of US$1:ZAR10.6. At the current exchange rate, the capital expenditure estimate appears low.
5.7.1 Process description The plant is designed for the treatment of 1.5 Mtpa to produce 1.2 Mtpa of saleable products in 6,700 hours per year.
Ore will be delivered to the primary crusher by truck and tipped into the jaw crusher for crushing to -250 mm. This material will then be passed to the stockpile conveyor and onto a series of ore bunkers. Ore will be reclaimed by gravity under the bunkers and is fed to a wet screen for separation of the ore which screens at 75 mm and 25 mm. The +75 mm oversize material will report to a secondary crusher for crushing and recycling while the -75 mm+25 mm becomes the first part of the lump product.
Undersized material, -25 mm, will be diverted to a second screen which screens at 6 mm and 0.5 mm with the oversize (-25 mm+6 mm) joining the lump product and the -6+0.5 mm being the fines product. The -0.5 mm will be retreated in cyclone to produce a grit tails while the -100 micron cyclone overflow is pressure For personal use only use personal For filtered.
Water recovery from the slimes will be from the belt filter press, without the need for a thickener, although a thickener might be more efficient for this recovery and provides some buffer capacity.
Figure 5.3 shows: A ROM pad, dump station and primary jaw crusher.
amcconsultants.com 56
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
A tripper fed aerial stockpile with and under-pile feeding system with six outlets for recovery. A twin screen wet screening plant which diverts material to the secondary crusher and to the product stockpiles. A cyclone dewatering system with a belt press filter. A multi-product stockpile with a travelling stacker. A water storage and recycling system.
The main screen is operated wet due to magnesium and environmental considerations including fugitive dust and associated plumes. Cyclones are used in water recovery. The final water recovery has a discard size of a -0.5 mm (50 micron) to 0.01 mm, 10 micron, as a conical stockpile and -0.01 mm (10 micron) going to a filter press.
Figure 5.3 Avontuur overall plant layout
5.7.2 Feed system and product handling The Avontuur FS discusses an option of removing the tripper feed system; a system which seems excessive for a plant treating only 1.5 Mtpa at the rate of 180 tph. The use of such a tripper system should isolate the plant from the mining operation, which is the link that is usually the major hold up in crushing operations.
Removing the tripper system risks compromising product quality due to no online monitoring or being able to distinguish between grades. Savings from the tripper system are offset by addition of stackers and additional FELs to load.
For 1.5 Mtpa of product, the product handling system again appears over-capitalized with a travelling stacker and four long double sided stockpiles. A simple radial stacker and multiple conical stockpiles could be a For personal use only use personal For substantially cheaper alternative, however there would be increased operating costs due to rehandle.
5.7.3 Capital expenditure – process plant Aquila advises that all plant equipment prices have been tested, with quotes provided for good quality equipment from reputable suppliers. Nonetheless, the plant capital expenditure estimate of approximately US$17M appears to AMC to be low for the amount of equipment installed.
amcconsultants.com 57
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Despite this assessment by AMC, it is likely that with a full technical audit and redesign, removing what AMC considers to be over-engineering (such as the large feed tripper system and the stacking stockpile system, which are not necessary for the proposed small tonnages), the capital cost should be in the region of US$20M, or about 15% to 20% higher than the Avontuur FS estimate. AMC has adopted this higher estimate for its Production Case.
5.7.4 Operating cost – process plant The overall plant cost is estimated at ZAR14/product tonne, or US$1.75/product tonne. Power is the major cost. Initial power until 2017 in the Aquila model was diesel and then provided by Eskom at a cost of ZAR70c/kWh. The report suggests ZAR6.2/t produced. The plant load list indicates a load of 1100 kW to 6.1 kWh/t. A 1000 kW generator uses 270 L/h of diesel and at a world cost of $1.0/L for diesel fuel and the production of 180 tph of product, a diesel cost alone of US$1.50/product tonne is implied, without operating and maintenance costs of the generators.
AMC’s judgement is that the plant operating cost will probably be closer to US$2/product tonne, and AMC has adopted this for its Production Case.
5.7.5 Process conclusion AMC concludes that the process is overcomplicated for a 180 tph plant, and a simpler arrangement and system could be used to reduce the capital and operating costs.
The overall process, however, is workable as designed because there is no separation technology or concentration technology involved and, consequently, no technical issues.
The Production Case uses 75% lump. This is consistent with other mines in the region. Handling between the ore and the crusher can create substantial breakage of material. Drop tests have not been performed on the material. Reduced lump may reduce the value of the production by pushing into the lower value fines. This type of issue may drive modifications of the plant so the product is fed from the jaw crusher directly to the plant without an additional handling step.
For 1.5 Mtpa of product, the product handling system again appears over-capitalized with a travelling stacker and four long double sided stockpiles. A simple radial stacker and multiple conical stockpiles could be a substantial cheaper alternative.
5.8 Product logistics The manganese handling logistics as considered in the Avontuur FS include: Stockpiling of ore on site. Reclamation from stockpile with a front-end loader, and loading into trucks, for short-haul transport to the on-site blending and stockpiling area. After the blended ore is processed, products will be loaded into trucks and hauled, by road, to a rail siding in the Hotazel area or to local sinter plants. The road haulage distance is approximately 60 km and will be conducted during day light hours only. Road haulage will be undertaken by contractors. Product, hauled from site, will be stored at one-of-two live siding stockpiles, with combined live capacity of 24 kt. Each live stockpile will be sufficient for the complete loading of one train bound for the Port of Saldanha, and two trains bound for the Port Elisabeth Rail line. The stockpiles would be reclaimed via bottom draw onto reclaim conveyor belts, and products would
subsequently be loaded into wagons. For personal use only use personal For In the initial years, trains are planned to be loaded by front-end loader.
A rail siding option study was conducted as part of the Avontuur FS Avontuur DFS. A range of options was considered including; construction of new sidings exclusively for Avontuur, and sharing co-user facilities with third parties. The preferred option siding for Avontuur, was a co-user facility, as the option exhibited lower capital costs. However, the capital cost estimate for the project includes allowance for an exclusive-use facility, albeit estimated at a conceptual level of accuracy.
amcconsultants.com 58
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Considerations for Avontuur product logistics have included: Two rail-to-port product logistic options; the Transnet links to the port of Coega, and the rail link to Saldanha. Two ports; the port of Coega and the port of Saldanha. Train sizes will be a maximum of 122 wagons, each with a 100 t payload to the Port of Saldanha, and 104 wagons of 63 t payloads for the Coega rail transport route.
The Avontuur FS states that "The largest single challenge facing the Project is the transport logistics associated with moving lumpy ore product to market, cost effectively, through a suitable South African port". And "The South African rail and port infrastructure is owned and managed by Transnet, a state owned enterprise. In recent years, Transnet has been unable to match capacity to demand. This ongoing inability provides a real risk for projects still to be developed, such as Gravenhage (Avontuur)".
The Avontuur FS also states that "Due to limited stockpiling available at the ports, the number of potential exporters, the use of a pull logistics system is proposed ", where product is railed to port once an order is placed, a vessel has been chartered and is en route.
Aquila has advised AMC that as at June 2014, no firm allocation is currently in place from Transnet for Aquila or other parties. Aquila has also advised that it attended the Manganese Industry Forum presentation on 3 April 2014, where the manganese export capacity allocation (MECA) 2 process for allocating interim rail and port capacity was discussed. At the presentation it was confirmed that: A number of manganese producers have applied for export allocation. A total of 16 Mtpa of export capacity will be available by Q2 2020 (approximately a year later than Transnet had communicated in early 2013). There is a base load of customers with their own rail loading facilities. There are new entrants (no rail facilities and utilization of the common user facilities). Capacity of 7.2 Mtpa will be available as part of MECA 2 until the move to the port of Ngqura. MECA 2 will have further capacity increases over the years through other channels such as Saldanha and Durban. Transnet team plans to present the MECA 2 process to various internal board committees. MECA 2 allocation will be announced after this process has been concluded and Transnet’s board approval has been received.
Given the above, AMC concludes Avontuur product logistics remain a significant risk to the project because firm allocations and plans for rail and port have not been determined.
5.9 Environmental and community issues 5.9.1 Overview The project faces no technical environmental challenges that cannot be responsibly managed using established methods and strategies. However, social and community sensitivities pose significant challenges in terms of consultation and the community’s appreciation of efforts undertaken to minimize, if not avoid, impacts concerning noise, dust, traffic safety and groundwater. Additionally, there will be community expectations for the project to contribute significantly to social infrastructure such as road improvement, health and education, and employment.
Technical environmental factors include protection of Camel Thorn trees, especially those used by raptors for breeding, loss of fauna habitat in general, and protection of endorheic pans (natural depressions without
natural outlets) which provide a critical habitat in an arid/semi-arid environment. For personal use only use personal For AMC considers the project’s closure cost estimate of ZAR54M is reasonable, provided the total area of disturbance is less than 250ha.
Environmental Impact Assessment (EIA) documentation has been submitted to the relevant agencies, with the final "umbrella" environmental approval being received in July 2012.
amcconsultants.com 59
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
5.9.2 Statutory approvals A thorough EIA document was developed in 2010/2011, and submitted to the relevant agencies for statutory assessment to obtain an "umbrella" approval. That approval was received in July 2012, together with permits for waste management and atmospheric emissions. As usual, these permits contain conditions concerning monitoring of impacts and reporting to agencies; none of these conditions is considered by AMC to be unreasonable or difficult to comply with.
Other secondary approvals (authorities to construct, operating licences, dangerous goods permits and the like) can reasonably be expected to be obtained through routine consultation with the agencies.
5.9.3 Flora and fauna Protected Camel Thorn and Grey Camel Thorn trees in the project area will be lost through clearing for the project. Of the 960 trees that occur in the area, 141 are scheduled to be lost. Environmental offsets are required to compensate for these losses, but the nature of the offsets is not clear from documentation available for this review; regeneration in undisturbed areas is an obvious approach.
Raptors use these camel thorn trees, especially for breeding. Management plans have been developed to provide 100-metre buffers for trees not lost through clearing. For trees scheduled for clearing but carrying raptors, clearing is to be delayed until after the breeding season, with a 300-metre buffer during that time.
The area around the project is characterized by intermittently-wet endorheic pans with no natural outflow. Evaporation between rainfall events can result in complete dryness, but the pans are a critical element of the local ecosystem. Management plans have been developed to prevent unnatural overland flows reporting to the pans, especially flows from the project infrastructure, which will have higher runoff factors than undisturbed land. Buffers of radius 100 m are also provided around the pans.
5.9.4 Water management In addition to the strategies noted in section 5.10.2.2 for protection of endorheic pans, drainage plans have been developed to contain potentially-contaminated water from project areas. That runoff will be collected in a storage dam which is central to the project water balance in this dry environment. The storage dam provides a critical buffer for managing periods of deficient and excess supply, and avoids wasteful discharge to the environment.
The water balance aims at maximum recycling of water, to minimize the need to abstract groundwater to meet project demands – neighbouring landowners also rely on groundwater for pastoral and other water supply.
Mine dewatering underpins the project water supply, supplemented by bores. All groundwater abstraction is monitored to ensure protection of neighbours’ supplies, based on a detailed groundwater model developed for the project. That model includes a complex water balance which can be progressively calibrated and refined during operations.
5.9.5 Closure and rehabilitation Generalized closure prescriptions have been developed for the different disturbances and landforms of the project. These prescriptions are aimed at prompt revegetation to control dust, which has significant potential for community concern, while producing safe, stable and non-polluting landforms and surfaces. AMC considers the prescriptions to be appropriate, and of a standard generally equal to those applied in Australia.
A cost estimate of ZAR54M has been developed. AMC has not been able to review the detailed basis of this estimate, but considers it to be reasonable for a total land disturbance (excluding pit voids) not exceeding For personal use only use personal For 250 ha (the open pit will occupy some 105 ha in about Year 13, when underground operations become the main source of ore). Costs of demolition during closure can be expected to be offset, in large part, by salvage revenue.
amcconsultants.com 60
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
5.9.6 Dust, noise and traffic Many of the mined materials are prone to dust generation, and unsealed-road traffic is a predictable source of fugitive dust. Dust impacts on vegetation, as well as on human receptors, will demand careful management.
In addition to prompt revegetation of disturbed surfaces, planned water sprays and chemical treatments on trafficked areas are likely to be necessary to minimize impacts. These strategies are neither novel or onerously expensive.
Sealing of at least some of the main road used to transport product to the port may be required, since truck movements will peak at 10 per hour (5 round trips per hour) – a truck movement on average every 6 minutes with a 24-hour operation. Water-spraying or chemical treatment of the unsealed haul route is probably unfeasible, not least due to cost and limited water supply.
Traffic safety is problematical, since the haul route also carries considerable slow-moving traffic (carts and the like). At least partial widening of the road may be required.
Noise impacts are inevitable, and best managed by selection of appropriate equipment and, where possible, adjustment of operating hours for some facilities.
5.9.7 Community Extensive community and stakeholder consultation was initiated in 2010 and 2011 with press and on-site advertisements, circulation of background documentation and of the scoping study report, and public meetings.
Predictably, employment is a key concern, with the region characterized by very low employment rates. The response has been a policy of preferential engagement of suitable people from the local population.
In response to community concerns about housing and pressure on services and infrastructure, negotiations have been held with local government agencies and a mining company already established in the area, to ensure provision of adequate services. The greatest risk is escalating and unrealistic expectations from the community.
Neighbouring landowners, who predominantly graze sheep and cattle, are a potential source of complaint because of dust, noise, traffic and groundwater impacts. One farm also grows an important medicinal plant. While such challenges are regularly faced by mining developments, they have the capacity to divert critical management resources, as well as engender community opposition to the project. Only through sustained and sensitive consultation, especially in non-crisis times, can these issues be effectively managed. Management effort can be enhanced by open availability of monitoring data, to pre-empt development of perceived problems by the community.
5.9.8 Environmental and community risks There is social risk associated with air quality (dust) and noise (blasting) and, perhaps most importantly, concerning road safety (haul route to port). The road safety issue could result in pressure from government to significantly upgrade the road to protect other road-users, many of whom use slow-moving vehicles whose interaction with haul-trucks could be a major safety hazard.
Unacceptable impacts on protected Camel Thorn trees could hazard the project’s development or at least constrain location of facilities. Environmental offsets for the trees to be lost have yet to be finalized.
For personal use only use personal For 5.9.9 Exploration Valuation Avontuur consists of a single tenement with most of the tenement’s value reflected in the Gravenhage manganese deposit. Three small manganese Inferred Resources do not add material value to the tenement and AMC has not attributed any additional value to these deposits.
amcconsultants.com 61
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
5.10 AMC Avontuur Production Case Aquila completed the Avontuur FS for the Gravenhage deposit in 2011. The Avontuur FS is based on producing 1.5 Mtpa of manganese ore products from open pit and underground mining.
AMC has developed a Production Case for Avontuur (AMC’s Avontuur Production Case). The case is a projection of mining and processing tonnages, grades, products, and costs. The case is provided to Grant Samuel for the consideration of value. AMC’s Avontuur Production Case is based on the information provided by Aquila, including the outcomes of the Avontuur DFS.
Physicals and costs for AMC’s Avontuur Production Case are presented on a 100% ownership basis as follows: Commencement of project construction in January 2016. Mining and processing of 22.8 Mdmt at an average grade of 39.7% Mn, which comprises Ore Reserves of 20.2 Mt at 40.12% Mn and Inferred Mineral Resources of 2.6 Mt at 36.4% Mn. Sale of 23 Mdmt of product (including low-grade ore). Moisture contents 0.5% for lump and 2% for fines. Capital expenditure of $243M (which includes provisions for closure and rehabilitation). Operating costs of $183/t of products.
A tabulated summary of AMC’s Avontuur Production Case is shown in Table 5.7.
Table 5.7 Avontuur AMC Production Case
Item Unit 2014 2015 2016 2017 2018 2019 2020 2021 2022 to 2027 to 2032 to Total 2026 2031 2034 Physicals Mined Ore kt - - - - 740 1,499 1,500 1,495 7,514 7,581 2,465 22,795 Mined Waste kt - - - 11,500 30,004 52,504 52,504 23,353 21,583 484 22 191,954 Product Tonnes ------Open pit - low silica lump kt - - - - 450 1,128 1,083 545 335 - - 3,541 Open pit - low silica high grade lump kt ------45 580 701 - - 1,326 Underground - medium grade lump kt ------4,589 5,625 1,961 12,175 Low grade lump kt ------750 750 Fines kt - - - - 163 330 330 329 1,653 1,668 7 65 5,238 Product Grade Open pit - low silica lump % Mn - - - - 41 40 40 39 41 - - 40 Open pit - low silica high grade lump % Mn ------44 44 44 - - 44 Underground - medium grade lump % Mn ------40 40 38 39 Low grade lump % Mn ------36 36 Fines % Mn - - - - 40 40 40 42 40 40 38 40 Capital Costs ------Initial / Expansion $M - - - 106 58 10 - 7 34 29 - 243 Total Capital Costs $M - - - 106 58 10 - 7 34 29 - 243 Operating Costs ------Mining $M - - - 0 156 274 274 134 543 302 93 1,776 Processing $M - - - 023331616649 Infrastructure $M - - - 0 9 16 15 15 103 111 54 322 Admin $M - - - 11 27 41 40 26 127 105 44 420 Rail $M - - - 024595959296296142935 Port $M - - - 017434343213213103674 Total Operating Costs $M - - - 11 234 435 434 280 1,297 1,043 442 4,175
5.11 Key risks and opportunities
AMC assesses the risks and opportunities for Avontuur as follows: For personal use only use personal For 5.11.1 Risks In AMC’s opinion, the processing plant is over-engineered and, based on experience in other low cost countries. Aquila has informed AMC that the high level of engineering and associated capital cost is to ensure lump production, recovery of water, and dust suppression due to environmental considerations. There is a risk that the fines might constitute a higher proportion of the product and this may result in lower average price for the product and higher in costs if plant modifications are required.
amcconsultants.com 62
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Operational readiness and availability of mining contractors is noted by Aquila in the Avontuur FS as being risks, and AMC concurs with that assessment. Scheduled project construction commencement of January 2015 appears to be optimistic, AMC has allowed for a delay in production start-up by one year relative to the production schedule provided by Aquila. This moves first ore production to 2018. There will be community expectations for the project to contribute significantly to social infrastructure such as road improvement, health and education, and employment, possibly resulting in higher costs than estimated. Technical environmental factors include protection of Camel Thorn trees, which might result in development constraints or additional costs to those estimated. It is a significant risk to the Avontuur project that firm allocations and plans for rail and port have not been determined.
5.11.2 Opportunities The Mineral Resource update, August 2013, was accompanied by a revised pit optimization indicating potential to increase the life and production rate of the mine. AMC suggests that the Avontuur FS should be updated accordingly, possibly improving the project’s economics. A review of the process plant and product handling design could reduce the operating and capital
costs relative to current estimates. For personal use only use personal For
amcconsultants.com 63
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
6 Exploration properties For Exploration Valuation methods used by AMC, refer to Appendix C.
6.1 Coal Aquila holds a 100% or 50% interest in 37 tenements in the Bowen Basin and Surat Basin in Queensland, Australia (Figure 6.1). The projects exhibit potential for a wide range of coal products, including thermal coal (TC), coking coal (CC), and pulverized coal injection (PCI), at predominantly underground and some open pit depths.
AMC has based its valuation on the tenements listed in the Qld Independent Tenement Report as summarized in Table 6.1.
Figure 6.1 Coal Exploration: Bowen and Surat Basin coal districts For personal use only use personal For
amcconsultants.com 64
Aquila – Independent Technical Specialist's Report Grant Samuel & AssociatesFor Pty Ltd personal use only 214034
Table 6.1 Exploration Coal: Australian tenements and summary of geology and valuation factors
Aquila Coal Tenement 1 EPC Name 1 Principal Holder 1 Aquila Grant Coal Stage Principal Likely Coal Resource Reserve AMC Summary Comments - Exploration, Coal Project Ownership 1 Date 1 Type Target Coal Depth (Mt) and Quality, Prospectivity Name 1 Measures Study (%) (CM) (m) (Mt) 2, 5 Level 3 4 5 Northern Bowen Basin Bowen River EPC 968 Bowen River Argos (Qld) Pty Ltd 100% 3-Aug-06 Coking/ Exploration - Crush Creek 0 to 200 None None Reconnaissance exploration has intersected thin Thermal Reconnaissance CM carbonaceous bands. Blenheim EPC 1211 Blenheim Aquila Coal Pty Ltd 100% 27-Jan-11 Coking/ Exploration - Rangal CM 0 to 500 None None Limited exploration by Aquila - no meaningful quality data. Thermal/ Reconnaissance Exploration coal is deep and lacks seam continuity with PCI intrusives present - low prospectivity EPC 1219 Blenheim Ext Aquila Coal Pty Ltd 100% 25-Feb-11 Coking/ Exploration - Rangal CM 0 to 500 None None No exploration in the area - no quality data available. Coal Thermal/ Reconnaissance in area is deep and lacks seam continuity with intrusives PCI present - low prospectivity EPC 1214 Stragglers Aquila Coal Pty Ltd 100% 21-Apr-11 Coking/ Exploration - Rangal/ 0 – 500 None None No exploration in the area - no quality data available. Coal Thermal/ Reconnaissance Moranbah Coal in area is deep and lacks seam continuity with intrusives PCI Measures present - low prospectivity EPC 752 Exevale Bowen Central Coal 50% 10-Apr-02 Coking/ Exploration – Rangal CM 200 – 500 None None Potential to produce a total yield of approximately 75% Pty Ltd Thermal/ Reconnaissance with half a semi soft coking coal and the remainder a PCI secondary thermal coal. Coking coal is low ash, low sulphur with moderate swell. The thermal coal is moderate ash with low sulphur and high energy. Coal in area is deep and lacks seam continuity with intrusives present - low prospectivity EPC 883 Mount Gothardt Bowen Central Coal 50% 23-Aug-05 Coking/ Exploration – Rangal CM 200 – 500 None None Potentially low sulphur, low volatile PCI coal. Limited data Pty Ltd Thermal/ Reconnaissance available. Exploration coal is deep in area and lacks seam PCI continuity with intrusives present - low prospectivity. Talwood EPC 985 Talwood Talwood Coal Pty 100% 29-Nov-05 Coking/ Pre-Development Rangal/ 0 – 400 78/107/250 PFS Coking + thermal, moderate prospectivity. Advanced Ltd Thermal Moranbah CM project with resources. Early data suggested high volatile bituminous coal. Recent data indicates Leichardt seam more favourable with 9.5% ash at 50% yield for second grade semi hard coking coal with low S, high P, high Fe/Ca ash. Vermont Upper seam requires low density separation to produce a 10-10.55 ash coking product for blending with Leichhardt Upper product, for a second grade semi hard coking coal with 30-40% yield and a thermal coal co-product of 15% yield and 15% ash. Vermont Lower seam 17-18% ash single thermal product at 50-55% yield. Isaac River EPC 830 Isaac River Bowen Central Coal 50% 9-Jul-03 Coking/ Exploration – Rangal/Fort 0 – 200 None None MDL444 Potentially a semi soft coking coal with low Pty Ltd Thermal/ Reconnaissance Cooper CM - sulphur and a secondary medium ash thermal coal with a PCI Burngrove/Fairh total yield of approximately 80 - 85%. EPC 830 no data. ill Formation Exploration results from nearby MDLs indicate yield low. A possible export thermal product but small and deep - low prospectivity.
amcconsultants.com 65
Aquila – Independent Technical Specialist's Report Grant Samuel & AssociatesFor Pty Ltd personal use only 214034
Aquila Coal Tenement 1 EPC Name 1 Principal Holder 1 Aquila Grant Coal Stage Principal Likely Coal Resource Reserve AMC Summary Comments - Exploration, Coal Project Ownership 1 Date 1 Type Target Coal Depth (Mt) and Quality, Prospectivity Name 1 Measures Study (%) (CM) (m) (Mt) 2, 5 Level 3 4 5 Northern Bowen Basin Eagle Downs EPC 795 Peak Downs East Bowen Central Coal 50% 25-Feb-03 Coking/PCI Exploration – Moranbah 250 – 700 None None Close to advanced projects/mines, but intrusions/faulting South Pty Ltd Reconnaissance downgrades prospectivity. Resource limited to deeper coal seams. Eagle Downs development nearby contains low volatile high rank coal. Selective seams (P Upper and Dysart)with high CSN may produce a low sulphur, low phosphorus marginal coking coal. The remainder may be processed to produce a PCI coal with ash between 7% and 9%.
Eagle Downs EPC 1077 Peak Downs East Aquila Coal Pty Ltd 50% 20-Dec-06 Coking/ Exploration – Moranbah 250 – 700 None None Contiguous with Eagle Downs South - similar comments, South Extended PCI Reconnaissance deep coal. Central Bowen Basin Washpool EPC 958 & Washpool Argos (Qld) Pty Ltd 100% 3-Jun-05 Coking/ Development Burngrove/Fair 0 to 100 125/10/62 108/95, FS Internal MDLs advanced pre-development project for high MDL403 / Thermal Project Hill Fm ranking coking product, pricing uncertain, limited market. ML80164 / EPC deep coking targets, but thin seams and ML 80164 / prospectivity low. Limited data available for EPC area - ML 80176 high raw ash low yielding coking coal with a potential secondary thermal coal - similar to Washpool. Mt Crocker EPC 966 Mt Crocker Argos (Qld) Pty Ltd 100% 3-Apr-06 Coking/ Advanced Burngrove/ 0 to 100 None quoted None Coking/Thermal - high raw ash low yielding coking coal Thermal Exploration Fair Hill Fm by Aquila with a potential secondary thermal coal - similar to Washpool but poorer quality. Coking coal composite analysis indicates a hard coking coal may be produced. May be low prospectivity, despite advanced exploration driling depending on marketability, yield and quality. Speculation EPC 1032 Speculation Creek Argos (Qld) Pty Ltd 100% 27-Mar-06 Coking/ Exploration - Burngrove/ 0 to 100 None None Early conceptual exploration, low prospectivity. Burngrove - Creek Thermal Reconnaissance Fair Hill Fm poorer quality than Washpool. Walton EPC1013 / Walton Argos (Qld) Pty Ltd 100% 16-Dec-05 PCI/ Pre-Development - Rangal CM 0 to 100 14/03/29 Concept A low to medium raw ash, moderate to high energy, MDL505 6 Thermal Resource moderate sulphur and low volatile product. The coal demonstrated high yields in the laboratory indicating a 10% ash PCI coal with limited coking coal characteristics is a likely product from the Rangal seams. A semi- anthracite component may be produced from the lower Burngrove seams but at a very low yield. Moderate prospectivity, but some steep dips and faulting, limited to Indicated and Inferred. EPC 2302 Walton North Argos (Qld) Pty Ltd 100% 27-Jun-11 PCI/ Exploration - Rangal CM 0 to 100 None None Comments similar to Walton, partly now also included in Thermal Reconnaissance MDL 505. Duaringa EPC 960 Duaringa Argos (Qld) Pty Ltd 100% 30–May-05 PCI/ Exploration - Rangal CM 100 to 300 None None Limited exploration with no coal intersections recorded. Thermal Reconnaissance Near Dingo deposit with similar geology, location and product. Structurally complex with thick sedimentary cover and minimal exploration has not allowed seam correlation. Low prospectivity.
amcconsultants.com 66
Aquila – Independent Technical Specialist's Report Grant Samuel & AssociatesFor Pty Ltd personal use only 214034
Aquila Coal Tenement 1 EPC Name 1 Principal Holder 1 Aquila Grant Coal Stage Principal Likely Coal Resource Reserve AMC Summary Comments - Exploration, Coal Project Ownership 1 Date 1 Type Target Coal Depth (Mt) and Quality, Prospectivity Name 1 Measures Study (%) (CM) (m) (Mt) 2, 5 Level 3 4 5 Northern Bowen Basin Wilpeena EPC 959 Wilpeena Argos (Qld) Pty Ltd 100% 25-Jan-06 PCI/ Pre-Development Rangal CM 0 to 100 None None Limited analysis results show high ash low volatile Thermal PCI/semi-anthracite where analysed. Advanced exploration, significant Exploration target. Modelled but not yet robust seam model, thick weathering, structural complexity with some steep dips, mineable coal likely in narrow zones extending along strike Adler Downs EPC 1153 Adler Downs Argos (Qld) Pty Ltd 100% 16-Oct-07 Thermal Exploration – Back Creek 0 to 300 None None Speculative for economic coal. One drillhole (GSQ Reconnaissance Group Duaringa 3-RD) intersected brown coal at 700m - low prospectivity. South-eastern Bowen Basin Cabbage EPC 1412 Cabbagetree Aquila Coal Pty Ltd 100% 31-Jan-11 Thermal Exploration - Baralaba CM 150-700 None None Early stage exploration - thin seams, deep thermal target, Tree Conceptual very low prospectivity. Dips approx 25 degrees. No quality data available. Limited Exploration, No quality data presented - anticipate HV, Sub bituminous, mod inherent ash, low sulphur, deep, Baralaba coal measures. EPC 2467 Cabbagetree West Argos (Qld) Pty Ltd 100% 31-Oct-13 Thermal Exploration - Baralaba CM 300-500 None None Early stage exploration - thin seams, deep thermal target, Conceptual very low prospectivity. No quality data available. Limited Exploration, No quality data presented, Anticipate HV, Sub bituminous, mod inherent ash, low sulphur, deep, Baralaba coal measures. Dawson Vale EPC 995 Dawson Vale Argos (Qld) Pty Ltd 100% 18-Jul-06 Thermal Exploration - Baralaba CM 100 to 200 None None Early stage exploration - thin seams, deep thermal target, Conceptual very low prospectivity. Dips approx 25 degrees. Thermal coal with high raw ash and an approximate yield of 52% at 17% ash, thin split seams. yld 52%@1.4, CC ash 17%, thermal, Underground, thin split seams, no recent quality data from Aquila, initial exploration, limited quality. Springvale EPC 965 Spring Vale Argos (Qld) Pty Ltd 100% 16-Feb-06 Thermal Exploration - Baralaba CM 100 to 200 None None Early stage exploration - thin seams, deep thermal target, Conceptual very low prospectivity. Dips approx 25 degrees. Quality inferred from adjacent Dawson Vale - thermal coal with high raw ash and low yield. yld 52%@1.4, CC ash 17%, thermal, Underground, thin split seams, no recent quality data from Aquila, initial exploration, limited quality information. Northern Surat Basin Injune EPC 1190 Bendoba Argos (Qld) Pty Ltd 100% 17-Apr-08 Thermal Pre-Development Walloon CM 0 to 100 unstated None Significant moderately prospective open cut exploration Exploration target with an unstated exploration target of good quality, Target but no infrastructure available to develop. Transaction similar to Plashett exploration target except all TC, and much larger tenement area. Thermal Coal - Walloon coals generally vary little in quality within adjacent deposits hence it is reasonable to infer generally similar properties to the nearby Cornwall deposit. Walloon Coal, high vols, yld 90% @9%ash, thin seams opencut, comprehensive quality dataset, Ca levels and ash fusion may restrict some markets.
amcconsultants.com 67
Aquila – Independent Technical Specialist's Report Grant Samuel & AssociatesFor Pty Ltd personal use only 214034
Aquila Coal Tenement 1 EPC Name 1 Principal Holder 1 Aquila Grant Coal Stage Principal Likely Coal Resource Reserve AMC Summary Comments - Exploration, Coal Project Ownership 1 Date 1 Type Target Coal Depth (Mt) and Quality, Prospectivity Name 1 Measures Study (%) (CM) (m) (Mt) 2, 5 Level 3 4 5 South-eastern Bowen Basin Injune EPC 1191 Box Creek Argos (Qld) Pty Ltd 100% 28-Feb-08 Thermal Exploration - Walloon CM 0 to 100 None None Near Bendoba/Cornwall advanced exploration targets. Conceptual Thermal Coal - Walloon coals generally vary little in quality within adjacent deposits hence it is reasonable to infer generally similar properties to the nearby Cornwall deposit. Walloon Coal, high vols, yld 90% @9%ash, thin seams opencut, comprehensive quality dataset, Fe and Ca may limit some markets
EPC 1192 Cornwall Argos (Qld) Pty Ltd 100% 31-Jan-08 Thermal Pre-Development Walloon CM 0 to 100 unstated None Significant exploration target with an unstated exploration Exploration target - Similar to Plashett exploration target except all Target TC. Thermal Coal - Walloon Coal, high vols, yld 90% @9%ash, thin seams opencut, comprehensive quality dataset, Fe and Ca may limit some markets. EPC 1203 Forest Vale Argos (Qld) Pty Ltd 100% 20-Feb-08 Thermal Exploration - Walloon CM 0 to 100 None None Near Bendoba/Cornwall advanced exploration targets. Reconnaissance Thermal Coal - Walloon coals generally vary little in quality within adjacent deposits hence it is reasonable to infer generally similar properties to the nearby Cornwall deposit. Assume - no data observed - Walloon Coal, high vols, yld 90% @9%ash, thin seams opencut, comprehensive quality dataset, Fe and Ca may limit some markets. 1 Tenement information source: Aquila March 2014 Quarterly Report, Aquila Website www.aquilaresources.com.au. 2 Resource Category: Measured (M), Indicated (I), Inferred (F). 3 Reserve Category: Proved (P), Probable (B). 4 Concept Study (C), Pre-feasibility Study (PFS), Feasibility Study (FS). 5 Resources and Reserve Information Source: Annual Report, Aquila Website www.aquilaresources.com.au/go/projects/queensland#hwashpool accessed 28 May 2014. 6 EPC 1013 terminated on 17.04.13 upon grant of MDL 505 which contains all areas previously contained in EPC 1013 and some small part of EPC 2302. Therefore AMC has retained reference to EPC 1013 and not adjusted the commentary on this tenement to MDL 505.
amcconsultants.com 68
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Aquila holds interests in a portfolio of 26 Exploration Permits for Coal (EPCs), 7 Mineral Development Licences (MDL) or applications (MDLa) and 4 Mining Leases (ML) or applications (MLa) in Australia, which cluster into four principal areas: the Northern Bowen Basin, Central Bowen Basin, South-eastern Bowen Basin, and the northern part of the Surat Basin. With the exception of MDL 505 ‘Walton’ which has replaced EPC 1013 now relinquished, AMC has not included specific reference to the MDL and MLs10 in the report, treating them as part of the underlying EPCs.
Aquila’s coal exploration properties in the Bowen Basin target known coal measures in the Permian-Triassic Bowen Basin, principally within the Moranbah Coal Measures and Rangal Coal Measures, as well as the Burngrove and German Creek Coal Measures. The Bowen Basin exhibits coals which vary in rank from sub- bituminous to anthracite, with hard coking coals predominantly in the Late Permian Moranbah Coal Measures and metallurgical coals including PCI coals from the Rangal Coal Measures and equivalent stratigraphy in the Baralaba Coal Measures and Bandanna Formation. Coal Resource and Coal Reserve estimates are reported for a number of the more advanced projects (Table 6.1). Table 6.1 also records those properties where concept studies, pre-feasibility studies, or feasibility studies have been completed.
Target coal measures in the Surat Basin in southern Queensland are predominantly in the Mid Jurassic Walloon Sub-group within the Juandah Coal Measures and Taroom Coal Measures. Surat Basin coal is historically known to be moderate to high in ash and low ranking, and generally suited to thermal markets.
The Australian coal development and pre-development projects are in the Bowen Basin with open pit hard coking to PCI and underground coking propositions, and include the Washpool hard coking coal development project (reviewed more fully in section 3), the Talwood coking coal pre-development project and the Walton PCI pre-development project, all of which have publicly announced Coal Resources and publicly announced Coal Reserves at Washpool. These were first reported in accordance with the 2004 JORC Code, and have not materially changed since last reported. Those Coal Resources and Reserves are summarized in Table 6.2. AMC has determined its valuations on the basis that Aquila has stated Coal Resources inclusive of Coal Reserves where applicable. It should be noted that this table does not include Eagle Downs.
Table 6.2 Exploration Coal Australia: Resources and Reserves summary
Project Coal Resources Resources Reserves Reserves Date Proposed Studies Type Total Total Production Completed Measured Indicated Inferred Proved Probable (Mt) (Mt) (Mt) (Mt) (Mt) (Mt) (Mt) Washpool Hard Coking 196.7 124.9 9.7 62.1 108.3 94.7 13.5 October 2012 2.6 Mtpa DFS open pit
Talwood Coking 434.9 77.9 107.6 249.3 - - - May 2013 Concept Walton PCI 46.6 14.4 3.1 29.1 - - - May 2013 Total 678.2 217.2 120.4 340.5 108.3 94.7 13.5 Source: Resource and Reserve Information Source: Aquila 2013 Annual Report, Aquila Website.
6.1.1 Summary of key technical factors Washpool has a significant Coal Resource. Whilst the Washpool DFS indicates it is likely to produce a good coking product, a relatively low range yardstick value per tonne is appropriate because of the quality and processing challenges which will significantly reduce yield, introduce high costs, and impact marketability and pricing. EPC 958 (Washpool), EPC 966 (Mt. Crocker) and EPC 1032 (Speculation Creek), surround the mining tenement MDL 403 (Washpool). Mt Crocker is an advanced exploration area but does not have a Coal Resource on which to base a resource yardstick valuation method.
Talwood has a significant Coal Resource of second grade semi-hard coking coal, however, the product would attract a significantly reduced price relative to products with standard coking coal indices. It is
For personal use only use personal For considered moderate in prospectivity by AMC. The project is less advanced than Washpool. The complex faulting has not been modelled and could affect proposed underground mining. AMC considers further drilling is likely to limit the areas of prospective longwall development due to fault dislocations. Given the yield is very low, and the coal exhibits a low crucible swelling number compared to Riverside, AMC considers
10 The other MDLs and MLs listed in the Independent Tenement Report are; MDL1 497, MDL403, MDL442, MDL 444, MDLa 497, MDLa 518, MDLa 519, ML 70389, MLa 80164, MLa 80176 and MLa 80177.
amcconsultants.com 69
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
this project is likely to be downgraded by further drilling and might produce an inferior product which would need to compete with the better quality existing producing coking coal mines in the region. The yardstick value chosen is therefore lower than used by AMC for Washpool.
Walton is an open pit PCI proposition, and is considered by AMC to be of moderate prospectivity. The Coal Resource size will be limited due to only one seam being potentially viable. The yardstick value chosen by AMC is therefore slightly lower than used at Talwood.
The early-stage exploration Australian coal exploration areas range from thermal to PCI to coking projects.
In the Northern Bowen Basin, Bowen River has had no exploration carried out since 2008 and very little coal quality data is available. The Blenheim projects target Rangal and Moranbah Coal Measures but limited exploration has been carried out.
Peak Downs East and Peak Downs East Extended are located immediately south-east of Eagle Downs. They are proximal to advanced exploration areas and operating hard coking coal mines. Some intrusions and faulting are present, particularly in the north-west where there appears to be structural dislocation against Eagle Downs. Any prospect for a Coal Resource is limited to the deeper coal seams and may be complicated by challenging structure and intrusions. It is considered to be of low to moderate prospectivity by AMC.
A number of the early-stage exploration areas in the Central Bowen Basin around Walton North and Duaringa target the Rangals and may provide a low volatile PCI product with acceptable-to-high ash levels. Results of drilling in the western parts of EPC 1013, EPC 2302 and EPC 960 to date have not been encouraging, as no coal has been intercepted as yet, although coal is likely to be present at greater depths.
Wilpeena targets both the Rangals and the underlying Burngrove Formation, which is more likely to produce a thermal product, and limited coal quality data suggest high ash semi-anthracite and low ash PCI/semi- anthracite. Wilpeena coal quality appears to suggest low volatile PCI coal, but it is complicated by structural dislocation, thick weathering and the Mackenzie River to the east. AMC considers that the modelling of coal seams exhibits limited continuity. There is no coal quality data, but coal quality is generally poor in Burngrove coals, and the prospectivity for PCI and TC is considered by AMC to be low.
No recent field work has been carried out over the South-eastern Bowen Basin tenements Springvale, Dawson Vale, Cabbage Tree and Cabbage Tree West. Limited coal quality data indicate a 52% yield with ash of 17%, for an underground proposition. Thin split seams may be an issue.
For the tenements in the Surat Basin, which have significant areal extent and are advanced exploration areas with exploration targets for a good quality thermal product, but no Coal Resource, a preferred value was chosen within the range of the yardstick per area and past expenditure method. In the northern part of the Surat Basin, Aquila has previously made reference to a significant Exploration Target in the order of several hundred millions of tonnes at Cornwall, and the four EPCs are good quality compared to other current Surat projects. At present, the prospect of future mine development is limited by difficulty in securing rail capacity to Brisbane, and no rail line to Gladstone port. Coal in Cornwall, Bendoba and Box Creek EPCs occurs in the Walloon Coal Measures and reports appear to indicate potential for high volumes and high yields with 9% ash. The EPCs have thin seams but present a potential open pit proposition. Forest Vale has minimal data. Coal quality data have been collected, and AMC notes that Fe and Ca may limit some markets. AMC considers these moderate prospectivity if infrastructure becomes available.
6.1.2 Potential environmental constraints to coal exploration projects 6.1.2.1 Talwood Coking Coal – environment and social
For personal use only use personal For MDLa 518 is at application status at present, noting grant was offered in February 2014 and accepted in March 2014, with formal grant notification to be provided.
A preliminary review of Environmentally Sensitive Area’s mapping and IRTM environmental constraints was carried out by AMC. The review identified the following potential environmental and approvals issues within EPC 985: Endangered regional ecosystems.
amcconsultants.com 70
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Isaac River and Skull Creek and other drainage lines. Strategic Cropping Land.
While these issues are common to coal projects in Queensland, they incur additional approvals complexity, time, effort and cost. Flood protection measures and environmental offsets (to offset clearing of regional ecosystems) can also incur material capital costs.
The location of the project in the Moranbah area means that the project, amongst many others, will compete for workforce, accommodation, social services and infrastructure, transport infrastructure and so on. These are endemic issues in Moranbah, and coal project proponents are often requested to assist with the ongoing and wider management of these issues.
6.1.2.2 Wilpeena PCI Coal Project – environment and social A preliminary review of Environmentally Sensitive Area’s mapping and IRTM constraints identified the following potential environmental and approvals issues within EPC 959: The Mackenzie River. Strategic Cropping Land. Endangered Regional Ecosystems.
While these issues are common to coal projects in Queensland, they necessitate additional approvals complexity, time, effort and cost. Flood protection measures and environmental offsets (to offset clearing of regional ecosystems) can also incur material capital costs.
6.1.2.3 Walton PCI Coal Project – environment and social A preliminary review of Environmentally Sensitive Area’s mapping and IRTM constraints identified the following potential environmental and approvals issues within or adjacent MDL 505: Taunton National Park. Wallaby Lane Nature Refuge. Rail and highway. Creeks and drainage lines.
Rail, road, creeks and drainage lines are common to coal projects in Queensland and typically necessitate additional approvals complexity, time, effort and cost.
The proximity to the Taunton National Park and Wallaby Lane Nature Refuge introduces a more unique and potentially unpredictable constraint to project approvals. Examples exist in Queensland where approvals have been granted in proximity to Nature Refuges (e.g. Galilee Coal Project environmental approval and Bimblebox Reserve) and other instances where Nature Refuges have been upgraded to higher levels of protection that prohibit mining (The Steve Irwin Nature Refuge becoming a Strategic Environmental Area under the Regional Interest Planning Act 2014). Hence the effect of the Wallaby Lane Nature Refuge on the project could be significant, or relatively minor.
However, the resource area, as mapped on Aquila’s ASX announcement dated 19 April 2012, largely avoids these constraints.
6.1.2.4 Summary of potential environmental constraints to exploration tenements A preliminary review of Environmentally Sensitive Area’s mapping and IRTM constraints by AMC identified the following potential environmental and approvals issues within the exploration tenements (Table 6.3Error!
For personal use only use personal For Reference source not found.). This is not an exhaustive appraisal and other constraints may apply. For example, searches using the EPBC Protected Matters Search Tool have not been carried out, nor have searches for contaminated land, wetlands and so on.
amcconsultants.com 71
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 6.3 Exploration Coal: Preliminary appraisal of potential environmental constraints on exploration tenements
Tenement EPC Name Category A Category B SCL/RIP Potential Other Environmental ESAs1 ESAs1 Triggers Constraints EPC 752 Exevale – ERE SCL Suttor Creek and other drainage lines. (MDL 442) MDL 442 Exevale – ERE SCL Kemmis Creek Nature Reserve. EPC 795 Peak Downs East – ERE – – (MDL 519) EPC 830 Isaac River – ERE SCL 2 x ML over EPC. Isaac River in EPC. (MDL 444) EPC 883 Mount Gotthardt – ERE SCL Kemmis Creek Nature Refuge. (MDL 442) EPC 1077 Peak Downs – ERE – – (MDL 519) East Extended EPC 958 Washpool – ERE SCL 2 x ML in SE corner. (MDL 403) MDL 403 Washpool – ERE SCL – (MLa 80164) EPC 959 Wilpeena – ERE SCL Mackenzie River. EPC 960 Duaringa – ERE – Railway & Highway, Wallaby Lane NR State Forest. EPC 965 Spring Vale – ERE SCL Surat Basin Rail Corridor. EPC 966 Mt Crocker – ERE SCL & Priority Nature Refuge MDL 403) Agricultural Area State Forest (Adjacent ML overlaps Washpool) Blackwater aerodrome Rail lines & highway EPC 968 Bowen River – ERE SCL Bowen River Restricted Area 48 ML overlaps Nature Reserve Wetland State Forest EPC 985 Talwood – ERE SCL Isaac River (MDLa 518) EPC 995 Dawson Vale – ERE SCL Surat Basin Rail Corridor EPC 1032 Speculation – – SCL ML Overlaps Creek EPC 1153 Adler Downs – ERE SCL Mackenzie River EPC 1190 Bendoba – ERE SCL & Priority – Living Area EPC 1191 Box Creek – ERE – – EPC 1192 Cornwall – ERE SCL RA 401, State Forest (MDLa 497) EPC 1203 Forest Vale – ERE SCL – EPC 1211 Blenheim – ERE SCL – EPC 1214 Stragglers – ERE – – EPC 1219 Blenheim Ext – ERE – – EPC 1412 Cabbagetree – ERE SCL State Forest EPC 2302 Walton North National Park – – Wallaby Lane NR Taunton National Park For personal use only use personal For MDL 505 Walton – – – – (Formerly EPC1013) EPC 2467 Cabbagetree – ERE SCL Boggomoss NR West 1 Environmentally sensitive areas. Explanatory notes for Error! Reference source not found.:
amcconsultants.com 72
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Category A and B Environmentally Sensitive Areas designate areas that are protected under one or more layers of regulation, and typically require more detailed impact assessment and extended approvals processes. Additionally, environmental offsets may also apply. Endangered Regional Ecosystems (EREs) are protected areas of remnant vegetation. Clearing of these areas typically require specific approvals, and environmental offsets. Offsets are typically costly, arduous to secure, and add to approval timeframes. Strategic Cropping Land and other Regional Interest Planning triggers refer to triggers that require an additional layer of approvals (recently introduced under the Regional Planning Interests Act 2014). While regulation and administrative processes are untested, it is considered likely that this approval will add to overall approvals complexity, cost and timeframes and potential risk of refusal or costly conditions. The effect of the "Other" potential constraints is varied and is difficult to summarize at the preliminary appraisal level. Exploration Permit – Coal (EPC). Strategic Cropping Land (SCA). Regional Planning Interest (RPI). Mineral Development Licence (MDL). Mining Lease (ML).
6.1.3 Valuation methods For Exploration Valuation methods used by AMC, refer to Appendix C. AMC applied three valuation methods to derive values for Aquila’s coal exploration assets, as follows: Method 1 – a yardstick value per tonne approach, for tenements with announced Coal Resources (Table 6.4). Method 2 – a yardstick value per square km area approach, where limited information was available or where AMC considered it more suitable than Method 3 (Table 6.5). Method 3 – for early-stage exploration areas, past exploration expenditure to reflect the value of exploration work in each tenement combined with a geologically-based PEM (Table 6.6).
Table 6.4 Exploration Coal: Method 1 – Resource yardstick estimated values Tenement Name Coal Type AMC Assessment Measured Indicated Inferred Total Coal AMC Low AMC High Comment Resource Resource Resource Resource Value Value Resource Resource Yardstick Yardstick (Mt) (Mt) (Mt) (Mt) ($M) ($M) EPC958 Washpool 1 Hard Coking Good quality coking 124.9 9.7 62.1 196.7 30.13 37.22 product, yield impacts margins, marketability and price uncertainty EPC985 Talw ood 1 Coking Deep, some thin and 77.9 107.6 249.3 434.9 22.55 27.86 unw orkable seams, some Measured potentially overstated EPC1013/ Walton 1 PCI PCI quality, may be 14.4 3.1 29.1 46.6 2.12 2.62 MDL505 limited in size 1 EPCs and internal MDLs/MLs with reported Coal Resource.
2 Coal Resource statements from the 2013 Aquila Annual Report and the Aquila website. For personal use only use personal For
amcconsultants.com 73
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 6.5 Exploration Coal: Method 2 – Resource yardstick estimated values Tenement Talw ood 1 Area Yardstick Yardstick AMC Low AMC High Low High Estimate Estimate Area Area Yardstick Yardstick (km2) ($M/km 2) ($M/km2) ($M) ($M) EPC958 Washpool 1 318 0.036 0.044 11.52 14.08 EPC959 Wilpeena 41.34 0.009 0.011 0.37 0.46 EPC960 Duaringa 209.88 0.009 0.011 1.9 2.32 EPC965 Spring Vale 82.68 0.009 0.011 0.75 0.92 EPC966 Mt Croker 740.94 0.036 0.044 26.84 32.81 EPC968 Bow en River 190.8 0.009 0.011 1.73 2.11 EPC985 Talw ood 1 54.06 0.045 0.055 2.45 2.99 EPC995 Daw son Vale 190.8 0.009 0.011 1.73 2.11 EPC1013/MDL505 Walton 1 19.2 0.063 0.077 1.21 1.48 EPC1032 Spec Creek 15.9 0.009 0.011 0.14 0.18 EPC1153 Adler Dow ns 241.68 0.009 0.011 2.19 2.68 EPC1190 Bendoba 550.14 0.036 0.044 19.93 24.36 EPC1191 Box Creek 381.6 0.018 0.022 6.91 8.45 EPC1192 Cornw all 585.12 0.018 0.022 10.6 12.95 EPC1203 Forest Vale 845.88 0.018 0.022 15.32 18.73 EPC1211 Blenheim 143.1 0.009 0.011 1.3 1.58 EPC1214 Stragglers 15.9 0.009 0.011 0.14 0.18 EPC1219 Blenheim Ext. 41.34 0.009 0.011 0.37 0.46 EPC1412 Cabbagetree 429.3 0.009 0.011 3.89 4.75 EPC2467 Cabbagetree West 604.2 0.009 0.011 5.47 6.69 EPC2302 Walton North 6.4 0.063 0.077 0.4 0.49 EPC 752 Exevale 98.58 0.009 0.011 0.89 1.09 EPC 795 Peak Dow ns East 54.06 0.072 0.088 3.92 4.79 EPC 830 Isaac River 34.98 0.009 0.011 0.32 0.39 EPC 883 Mt Gotthardt 38.16 0.009 0.011 0.35 0.42 EPC 1077 Peak Dow ns East Extended 9.54 0.072 0.088 0.69 0.84
1 EPCs and internal MDLs/MLs with reported Coal Resource.
For personal use only use personal For
amcconsultants.com 74
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 6.6 Exploration Coal: Method 3 – past expenditure method estimated value ranges Tenement Name Reported PEM Low PEM High Past Past Expenditure Expenditure Expenditure for life of EPC Value Low Value High ($M) ($M) ($M) ($M) ($M) EPC958 Washpool 1 5.69 1.5 2 8.53 11.38 EPC959 Wilpeena 2 1.5 2 3 4 EPC960 Duaringa 0.58 0.5 0.8 0.29 0.47 EPC965 Spring Vale 0.24 0.5 0.8 0.12 0.19 EPC966 Mt Crocker 2.35 0.5 0.8 1.17 1.88 EPC968 Bow en River 0.38 0.5 0.8 0.19 0.31 EPC985 Talw ood 1 11.15 1.5 2 16.72 22.29 EPC995 Daw son Vale 0.87 0.5 0.8 0.43 0.7 EPC1013/MDL505 Walton 1 3.1 1.2 1.5 3.73 4.66 EPC1032 Spec Creek 0.31 0.5 0.8 0.16 0.25 EPC1153 Adler Dow ns 0.15 0.5 0.8 0.08 0.12 EPC1190 Bendoba 2.4 1 2 2.4 3.6 EPC1191 Box Creek 0.73 0.5 1 0.37 0.59 EPC1192 Cornw all 3.56 0.5 2 1.78 2.85 EPC1203 Forest Vale 1.01 0.8 1 0.81 1.01 EPC1211 Blenheim 0.09 0.5 0.8 0.05 0.07 EPC1214 Stragglers 0.03 0.5 0.8 0.02 0.03 EPC1219 Blenheim Ext. 0.06 0.5 0.8 0.03 0.04 EPC1412 Cabbagetree 0.04 0.5 0.8 0.02 0.03 EPC2467 Cabbagetree West 0 0.5 0.8 0 0 EPC2302 Walton North 0.28 0.5 0.8 0.14 0.23 EPC 752 Exevale 0.76 0.5 0.8 0.38 0.6 EPC 795 Peak Dow ns East 3.7 1.5 2 5.55 7.39 EPC 830 Isaac River 0.66 0.5 0.8 0.33 0.53 EPC 883 Mt Gotthardt 0.51 0.5 0.8 0.25 0.41 EPC 1077 Peak Dow ns East Extended 1.44 1 1.2 1.44 1.72
1 EPCs and internal MDLs/MLs with reported resource
AMC considers Method 1 the most appropriate valuation method for the pre-development projects and development projects with Coal Resources, based on comparable transactions in similar coal settings with Coal Resources In choosing appropriate yardstick values, AMC collected comparable transactions which reflected a similar range of projects from early stage exploration properties to more advanced exploration properties with Coal Resources (Appendix D). The transactions were sourced principally from the Bowen Basin and Surat Basin. The transactions date from the last eight years, with most within the past five years, which AMC considers relevant as it represents a range of market and pricing conditions.
AMC considered the comparable transactions and used a baseline resource yardstick value of $0.02/t as representative of low quality, Inferred Resource stage projects. This was based on the average yardstick value from a number of relevant transactions including Wavenet, MetroCoal, Gastar and Enterprise (Appendix D). AMC then modified this resource yardstick value for the higher quality coal projects to reflect their higher potential value, and increased the yardstick up to a maximum of $0.25/t, assigning progressively higher factors for the confidence classification levels of Measured, Indicated and Inferred in the Coal For personal use only use personal For Resource estimates. This allowed AMC to appropriately consider resource classification confidence, coal quality, potential product, structural complexity, seam prospectivity, and potential workability within a fair market value context.
For Method 2, a value within the range of $0.009/km2 to $0.088/km2 of exploration tenement was applied. In choosing the area-based yardstick values for the Surat Basin, AMC applied a value within the range of early stage thermal and lower quality coal projects which AMC considers comparable, such as the Columboola, Dingo, Yamala and Conarco transactions (Appendix D).
amcconsultants.com 75
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
For exploration projects without a Coal Resource in the Bowen Basin, AMC used a combination of Method 2 and Method 3, weighted towards Method 3, as AMC considered the values from Method 2 to be less reflective of the coal quality and prospectivity.
6.1.4 Valuation range A brief summary of key information is provided in Table 6.1, and the values derived are indicated in Table 6.4, Table 6.5 and Table 6.6.
6.1.5 Preferred values AMC’s preferred values were chosen in the context of the technical merit of each project, as summarized in Table 6.1.
In AMC’s view, the Coal Resource yardstick approach for Washpool, Talwood and Walton best reflects the fair market value for the types of coal product and level of knowledge of these projects, discounted to address technical risk and therefore marketability and pricing aspects such as coal quality, and also yield, depth, potential for intrusions and structure, likely infrastructure access, and other technical challenges in each individual project. The Exploration Valuation for Washpool is included separately in Table II in the Executive Summary, and so is separated from the remaining Exploration Valuations in this section and Table 6.7. The MDLs and MLs are included in the valuation of the advanced properties; Washpool, Talwood and Walton, as they are located on MDLs and MLs within exploration tenements and AMC regards them as advanced exploration to pre-development stage projects. Eagle Downs has been excluded because it is in development, and a standalone income-derived basis is appropriate.
Table 6.7 summarizes the range of values from the three methods. A preferred value was chosen using AMC’s coal experience and knowledge of market transactions, and was factored for Aquila’s share to arrive at a range of values for Aquila’s interests from $40M to $110M, with a preferred value of $73M. This value excludes Washpool which is reported elsewhere in this report.
Table 6.7 Exploration Coal: AMC valuation ranges and preferred values
Tenement Name AMC Preferred Method Applied Aquila Selected Selected AMC Ownership Method Low Method High Preferred (Aquila % (Aquila % Value - Share) Share) Aquila (%) ($M) ($M) ($M)
EPC958 Washpool 1 Method 1 Resource Yardstick 100 30.13 37.22 33.68 Washpool Total (Rounded to 2 significant figures) 30 37 34 EPC959 Wilpeena Method 3 Past Exploration Expenditure 100 3.00 4.00 3.50 EPC960 Duaringa Method 3 Past Exploration Expenditure 100 0.29 0.47 0.47 EPC965 Spring Vale Method 3 Past Exploration Expenditure 100 0.12 0.19 0.12 EPC966 Mt Crocker Method 3 Past Exploration Expenditure 100 1.17 1.88 1.88 EPC968 Bowen River Method 3 Past Exploration Expenditure 100 0.19 0.31 0.31 EPC985 Talwood 1 Method 1 Resource Yardstick 100 22.55 27.86 25.20 EPC995 Dawson Vale Method 3 Past Exploration Expenditure 100 0.43 0.70 0.70 EPC1013/MDL505 Walton 1 Method 1 Resource Yardstick 100 2.12 2.62 2.37 EPC1032 Speculation Creek Method 3 Past Exploration Expenditure 100 0.16 0.25 0.23 EPC1153 Adler Downs Method 3 Past Exploration Expenditure 100 0.08 0.12 0.12 EPC1190 Bendoba Method 2 Area Yardstick & Method 3 Past Exp Exp2 100 2.40 24.36 12.57 EPC1191 Box Creek Method 2 Area Yardstick & Method 3 Past Exp Exp 100 0.37 8.45 4.08 EPC1192 Cornwall Method 2 Area Yardstick & Method 3 Past Exp Exp 100 1.78 12.95 7.05 EPC1203 Forest Vale Method 2 Area Yardstick & Method 3 Past Exp Exp 100 0.81 18.73 8.97 EPC1211 Blenheim Method 3 Past Exploration Expenditure 100 0.05 0.07 0.07 EPC1214 Stragglers Method 3 Past Exploration Expenditure 100 0.02 0.03 0.03 EPC1219 Blenheim Extended Method 3 Past Exploration Expenditure 100 0.03 0.04 0.04 EPC1412 Cabbagetree Method 3 Past Exploration Expenditure 100 0.02 0.03 0.03 EPC2467 Cabbage Tree West Method 3 Past Exploration Expenditure 100 0.00 0.00 0.04 EPC2302 Walton North Method 3 Past Exploration Expenditure 100 0.14 0.23 0.23 EPC 752 Exevale Method 3 Past Exploration Expenditure 50 0.38 0.60 0.30 EPC 795 Peak Downs East Method 3 Past Exploration Expenditure 50 2.78 3.70 For personal use only use personal For 3.70 EPC 830 Isaac River Method 3 Past Exploration Expenditure 50 0.17 0.27 0.22 EPC 883 Mount Gotthardt Method 3 Past Exploration Expenditure 50 0.13 0.21 0.17 EPC 1077 Peak Downs East Extended Method 3 Past Exploration Expenditure 50 0.72 0.86 0.79 Total excluding Washpool 40 109 73 Total Estimated Value (Rounded to 2 significant figures) 110 1 EPCs and internal MDLs/MLs with reported Coal Resource. 2 Exp Exp = Exploration Expenditure.
amcconsultants.com 76
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
6.2 Iron Ore 6.2.1 Thabazimbi Iron Ore Project 6.2.1.1 Geology The Thabazimbi Iron Ore Project consists of five tenements located in the Magisterial District of Thabazimbi, Limpopo Project, South Africa. The Donkerpoort, Klipgart, Vlaknek, Rotterdam, and Wachteenbietjiesdraai prospecting rights (Figure 6.2) cover a total of 727.3 km2 about 230 km north of Johannesburg surrounding the Thabazimbi township. The tenements are held as part of the TJV with Rakana Consolidated Mines Pty Ltd in which Aquila holds 74%. A Mining Right Application has been submitted over the Meletse iron ore deposit approximately 30 km east of the Thabazimbi township on the Donkerpoort and Klipgat prospecting rights.
Figure 6.2 Thabazimbi Iron Ore Project tenement location
The Thabazimbi area has produced hematite iron ore for many years with initial discovery in 1919 and production from Thabazimbi since 1931. Aquila was first granted tenements in the area in 2006 (as part of the TJV). Exploration began in 2007 leading to the discovery of the Meletse iron ore deposit on the
Donkerpoort and Klipgat prospecting rights. For personal use only use personal For
Mineral Resources for the Meletse deposit reported at a 50% Fe cut-off grade are listed in Table 6.8.
amcconsultants.com 77
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Table 6.8 Thabazimbi: Meletse Mineral Resources as at 30 June 2013
Classification Tonnes Fe SiO2 Al2O3 P LOI (Mt) (%) (%) (%) (%) (%) Measured 37.1 62.28 7.57 0.68 0.045 1.26 Indicated 23.5 60.85 9.35 0.75 0.052 1.59 Inferred 20.2 59.20 11.15 0.83 0.059 1.76 Total 80.8 61.09 8.98 0.74 0.051 1.48
The Meletse iron ore deposit is underlain by clastic sedimentary rocks of the Waterberg Group, granite of the Bushveldt Complex, BIF of the Penge Iron Formation and dolomite of the Malmani subgroup. Hematite lodes were identified in the BIF of the Penge Iron Formation from surface geological mapping and understanding of the distribution of the lodes investigated by drilling.
Initial interpretation of the lode distribution changed as further drillhole data became available and the current Mineral Resource estimate considers six lodes (A, B, C/D, G, F H) and a collection of smaller lodes referred to as the Lenses (Figure 6.3). Hematite lodes were interpreted at a 50% Fe cut-off grade and form irregularly-shaped bodies at different stratigraphic levels in the Penge Iron Formation. The lodes dip between 20º and 40º to the south-west and bifurcate and coalesce laterally. Hard lump material in the lodes mainly consists of a martite-hematite assemblage. Rafts of unaltered BIF can occur within the hematite lodes.
Figure 6.3 Thabazimbi: Oblique view looking south-west showing hematite lodes
The Meletse Mineral Resource estimate is based on 163 drillholes with 10 diamond drillholes and the rest RC drillholes. Drillhole spacing ranges from 30 m to 100 m. Most of the drillholes are near-vertical but some are inclined to intersect the dipping lodes.
Drillhole collars were surveyed and downhole surveys completed using a non-magnetic method.
Drillholes were geologically logged and samples at 1 m intervals in mineralization. Samples were prepared and analyzed at independent laboratories using inductively coupled plasma optical emission spectroscopy (ICP-OES).
Relative densities have been determined by helium pycnometer on RC cuttings. AMC notes that the relative
For personal use only use personal For densities were determined on RC cuttings which may not reflect in situ bulk density that incorporates voids and discontinuities.
A quality control protocol was in place that consisted of duplicate samples and certified blank samples. AMC notes that this protocol does not meet accepted industry practice as there are no certified reference materials for the economic elements and important associated compounds. The Mineral Resource consultant that completed the resource estimate noted that quality control data were not available for the most recent drilling.
amcconsultants.com 78
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The hematite lodes were interpreted and linked into three dimensional wireframes. Grades11 were estimated into a block model with estimation parameters derived from a study of variography.
The Mineral Resource estimate has been classified as Measured, Indicated and Inferred Resource in accordance with the 2004 JORC Code. The classification was based on parameters that reflect confidence in the estimated grades. AMC notes that the approach to resource classification has led to a checkerboard appearance where areas of the highest confidence category (Measured Resource) form isolated patches around drillholes suggesting lower confidence in continuity. However if Measured Resource had been classified as Indicated Resource, there would be no effect on the quantum of Ore Reserve as both are considered in Ore Reserve estimation.
AMC considers that the Mineral Resource estimate has been completed using accepted industry practice with drillhole data supported by an incomplete quality control protocol.
6.2.1.2 Exploration Exploration has been carried out by Aquila on the other tenements in the Thabazimbi Iron Ore Project. The exploration has been targeted on the favourable stratigraphic unit of the Penge Iron Formation where it is exposed by a series of regional-scale thrust faults.
Exploration in 2008 was targeted on the Klipgat area including drilling of iron ore occurrences. Geological mapping followed by drilling on the Rotterdam tenement identified an iron ore occurrence at Cornwall and a number of iron ore occurrences were identified in other areas from geological mapping and surface sampling. From 2010 most exploration activity was focussed on resource definition drilling at Meletse.
In 2013 geological reconnaissance identified iron ore exploration targets on the Vlaknek and Klipgat tenements. The Randstephanie South occurrence near Meletse and the Cornwall occurrence are the most advanced exploration targets. Figure 6.4 shows iron ore exploration targets on the Thabazimbi tenements.
Figure 6.4 Thabazimbi Iron Ore Project exploration targets For personal use only use personal For
11 Fe, MnO, SiO2, CaO, MgO, Al2O3, K2O, P, S, loss on ignition
amcconsultants.com 79
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
More than $7M has been spent on active exploration (plus administrative and tenement costs) on the tenements excluding Donkerpoort since the tenements were granted including $4.3M on drilling especially at Klipgat and Rotterdam.
6.2.1.3 Mining Thabazimbi does not have an Ore Reserve. A concept-level study was completed in June 2013. The concept-level study included concept level geotechnical and pit optimization methods to create a pit design. The pit design tonnages closely match the Production Case of 4 Mtpa.
AMC concludes from its review of the concept-level study and other information provided by Aquila that important parameters and variables impacting on productivity, operating cost and capital expenditure have been thoroughly considered in the mine planning for Thabazimbi.
Key aspects of the mine plan as developed by Aquila are listed in Table 5.5.
Table 6.9 Thabazimbi mine plan – key aspects
Item Features Mining method Conventional drill-and-blast and load-and-haul. Study status Concept -level study June 2013. Mine layout One pit – starter pit, two pushbacks and a final pit. Simultaneous operation of five mining locations. Steep terrain and contour mining. Working space may not allow realization of 4 Mtpa due to congestion. Bench height 12 m. Pit design and schedule Whittle pit optimization and detailed pit design and use of MineSched scheduling software. Geotechnical Partial wall failure can be expected especially during heavy rain. Blend design DMS recovery profiles are not optimized. Material movement 10% ramp. 25 m wide roads – two lane. Road width will need to be a greater width to use of 789 trucks. Primary equipment 4 x Cat 4040. 24 x Cat 789 Trucks. 7 x D25KS Drilltech Drills.
6.2.1.4 Processing Ore will be crushed using a jaw crusher to below 175 mm and then open circuit secondary crushed with a nominal 40 mm closed side setting (CSS) after pre-screening at 50 mm. The material will then be tertiary crushed in closed circuit down to 32 mm and the product split into a direct shipping ore (DSO) stockpile and a dense media separation (DMS) feed pile. Other key plant sections are: DMS plant The DMS plant material with a size range of -32 mm will be washed at 1 mm and the -1 mm diverted to a spiral section. The -32 mm+1 mm fraction will be slurried with a ferrosilicon dense media and fed to a large DMS cyclone for separation. This produces the overflow stream and an underflow stream and both of these will be drained on static screens to recover correct density medium and then washed on vibrating screens to remove adhering media. The final product will be diverted to the screening area where it will be mixed with the DSO stream for screening at 6 mm. The oversize reports to the lump pile and fines to the fines stockpile. The waste material is conveyed to a waste disposal conveyor for disposal at the waste dump. In
AMC’s view, there is potential to crush/grind this relatively coarse material (-32 mm+1 mm) down to For personal use only use personal For spiral size for additional yield. The DMS plant is expected to reject 20% of its feed material to waste. Spiral plant The -1 mm fraction is dewatered/deslimed and fed to the rougher spirals to produce a concentrate and tailings. The concentrates are cleaned on a set of cleaner spirals while the tailings are scavenged for additional recovery.
amcconsultants.com 80
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The products, both tailings and concentrate, are dewatered using dewatering screens while the slime products gravitate to a thickener for water recovery. The spiral concentrate is conveyed directly to the fines stockpile and the tailings partly to the waste dump and the slimes to a tailings dam.
No testwork has been conducted to confirm the weight splits and efficiency of separation. For the lump/fines distribution, the 65:35 split is an assumed value based on crushing core and obtaining 90% lump. Drop tests have not been conducted to confirm this value.
The grade of the ore tested by this programme was >67% Fe with the fines dropping to 64%. On this basis, the DMS plant is barely needed which is why it is only proposed to treat 15% of the feed.
While the DMS plant has been designed to handle 250 tph of feed, or 52% of the feed, it is proposed that the DMS plant will only process 15% of the overall feed. The expectation is that the main crushing plant will be fed with low grade material as a batch process with the material stockpiled. Once sufficient material has been stockpiled then the DMS plant will be operated at 250 tph with both the DSO material and DMS products feeding the product screens together.
It is proposed that production will be 85% DSO product, being 65% lump and 35% fines. The remaining 15% of the product will come from a DMS plant where 20% of the feed material will be rejected to create a DMS concentrate in the same lump/fines ratio.
6.2.1.5 Environment and community issues Statutory approvals
An application for a Mining Right was submitted in July 2013. Given the normal iterative process with the regulator, it is anticipated that the permit will be obtained in the third quarter of 2014. None of the issues addressed in the application appear contentious.
An EIA document and associated EM Plan are being prepared by experienced consultants, based on baseline and other studies which both allow impact assessment and mitigation planning and provide a basis for quantitative measure of actual impacts in operational monitoring programmes. There appears to be no overwhelming environmental issue facing the project, although considerable work remains to be completed on hydrogeology and water supply and acid drainage risks, and additional surveys are necessary to fully characterize potential impacts on conservation-sensitive bird species. Social and community issues are a particular focus of the regulator and an appropriate social impact assessment is in progress. Timelines for EIA submission and approval are not clear; once submission occurs, a period of six to twelve months to obtain final approval is a realistic expectation.
Individual environmental issues
Attention is required in planning surface water management programmes, to avoid sedimentation impacts on ephemeral streams in the project area. Most runoff on disturbed areas is to be captured for process water supply, but diversion of overland flows around project facilities to natural streams will need to consider sediment load controls.
Groundwater impacts are not yet fully assessed, as the requisite hydrogeological and water supply studies, and modelling have not been completed. However, it has been established that significant quantities of groundwater exist in the project area, and that the Crocodile River is a potential water source.
Ecological issues (aquatic and terrestrial) appear to be generally manageable with established techniques
For personal use only use personal For and strategies, but more surveys are required to allow thorough assessment of impacts on International Union for the Conservation of Nature (IUCN) Red Data species – Blue Crane, White-backed Vulture and Cape Vulture. These are volant (flying) species, easily able to evade instantaneous impacts, so that only the removal of unique and rare habitats are likely to result in unacceptable impacts – given the nature of the surrounding terrain and vegetation, such an occurrence appears improbable.
No information on acid drainage assessment was available for this review. At the very least, the drill-log database should be reviewed for sulphur concentrations (>0.2%S is a rule-of-thumb for acid drainage risk),
amcconsultants.com 81
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
and acid-base accounting testwork carried out on representative samples of high-S material. Kinetic (column-leach) testwork on samples with significant acid-forming potential would then allow prediction of time taken for acidity to develop once material is exposed to air and water. Risks of metal and metalloid enrichment of drainage water from waste stockpiles and tailings through near-neutral chemical processes could also be assessed through neutral-pH leaching of sample material.
A closure estimate of ZAR85M-ZAR104M has been developed, based on generic prescriptions for the shaping and revegetation of different types of disturbance and landform (waste stockpile, tailings storage, plant area, dams, roads etc.). AMC has not had access to the base data for this estimate, but considers it to be generally realistic for a total disturbance footprint of up to 750 ha to 900 ha. The closure cost would likely increase markedly if acid-drainage issues proved to be a significant management issue.
6.2.1.6 Key risks and opportunities Risks: The operating costs for the mining area do not appear to show an increased cost when the DMS plant is operating, even though extra material will need to be mined to provide a fixed output tonnage. An Ore Reserve has not been estimated, and a pre-feasibility study and feasibility study are required before project commencement. This includes geotechnical studies to reduce the risk of wall failures. This process might result in a materially different mine plan. Congestion in-pit could reduce the ability to safely and continuously deliver 4 Mtpa. Steep terrain may slow pit commencement and post risks for equipment. DMS recovery profiles are not optimized and this may affect blend design. Social and community issues are a key focus of the environmental regulator, and a social impact assessment forms a critical part of the EIA and other documents prepared for this project. Sustained and regular consultation and liaison with communities and regulators can be expected to minimize social risks to acceptable levels. Acid drainage risks have yet to be assessed in detail. If acid drainage is a significant issue, costs of managing acid-forming material and closure could also be significant.
Opportunities:
The ore is moderate in Fe and high in SiO2 but the alumina and phosphorus are low. These latter two values are regarded as the deleterious elements, and so low values are very advantageous and may lead to a premium price. Refinement in pit design could reduce waste mining and, therefore, mining costs.
6.2.1.7 AMC Expected Value case AMC has developed an Expected Value case for Thabazimbi. The case is a projection of mining and processing tonnages, grades, products and costs. Grant Samuel provided AMC with the financial inputs for the Expected Value case. AMC considered the Expected Value case, as well as other Exploration Valuation methods, when determining an exploration value for Thabazimbi.
An updated scoping study was completed for Thabazimbi in 2013. The scoping study was based on two production scenarios; a 3 Mtpa and a 4 Mtpa production case.
Results from the scoping study indicate that the 4 Mtpa production scenario resulted in a higher value than the 3 Mtpa production scenario. Therefore, AMC selected the 4 Mtpa production scenario upon which to base its Expected Value case.
Physicals and costs are herein are presented on a 100% ownership basis. For personal use only use personal For
AMC’s Thabazimbi Expected Value case is summarized in Table 6.10. Key aspects of AMC’s Thabazimbi Expected Value case are: Construction commencement in January 2017. Mining and processing of 66.8 Mdmt at an average grade of 62% Fe, based on a Mineral Resource of 80.8 Mt at 61% Fe. Products of 42.5 Mdmt of lump and 21 Mdmt of fines.
amcconsultants.com 82
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Total capital expenditure of $339M. Total operating costs of $72.30/t of product.
Table 6.10 summarizes key parameters of AMC’s Thabazimbi Expected Value case.
Table 6.10 Thabazimbi Expected Value case
Item Unit 2014 2015 2016 2017 2018 2019 2020 2021 2022 to 2027 to 2032 to Total 2026 2031 2036 Physicals Mined Ore kt - - - - 615 1,652 2,616 3,585 20,916 20,897 15,637 65,918 Mined Waste kt - - - - 9,595 29,405 39,170 39,526 193,868 209,021 51,741 572,326 Lump Product Tonnes kt - - - - 387 1,047 1,657 2,266 13,284 13,297 10,023 41,961 Lump Product Grade % Fe - - - - 62 62 62 62 62 62 62 62 Fines Production Tonnes kt - - - - 209 564 892 1,220 7,153 7,160 5,397 22,595 Fines Production Grade % Fe - - - - 62 62 62 62 62 62 62 62 Capital Costs ------Initial / Expansion $M - - - 127 152 25 6 7 14 9 - 340 Total Capital Costs $M - - - 127 152 25 6 7 14 9 - 340 Operating Costs ------Mining $M - - - - 18 55 74 77 385 412 125 1,146 Processing $M - - - - 2 4 7 9 51 50 36 159 Infrastructure $M - - - - 3 8 13 17 96 96 73 306 Admin $M - - - 13 20 16 20 25 148 152 97 491 Rail $M - - - - 18 49 77 106 619 619 467 1,955 Port $M - - - - 6 15 24 33 194 194 146 612 Rehabilitation $M - - - - - 1 1 1 3 3 3 12 Total Operating Costs $M - - - 13 67 148 216 267 1,497 1,527 946 4,681
6.2.1.8 Valuation The Thabazimbi Iron Ore Project consists of a number of tenements, one of which (Donkerpoort) hosts the Meletse iron ore deposit. Active exploration on other tenements has identified other iron ore occurrences that have not been reported as Mineral Resources.
AMC concluded that valuation of the Meletse iron ore deposit should not be considered as a production case because the project assessment is limited to a scoping study level. Rather, AMC has used the Expected Value method for consideration of Meletse. On this basis, and considering the qualifying factors referred to above, AMC has concluded that the Expected Value approach indicates a value of $100M for this project.
AMC has not identified transactions for tenements containing Mineral Resources in South Africa that might be used to determine a yardstick value for Meletse. Yardstick values for Pilbara transactions (Appendix E) indicate values for Aquila’s interest in the Meletse deposit of between $38M and $62M.
Taking the Expected Value and Yardstick methods into account, AMC has determined a value for Aquila’s interest in the Donkerpoort tenement of between $50M and $100M with a preferred value of $75M.
Active exploration on other tenements in the Thabazimbi project has identified iron ore occurrences that have not been reported as Mineral Resources. The tenements cover the prospective stratigraphy and structure that hosts iron ore deposits in the region. A total of $8.1M has been spent on effective exploration on these tenements, although some expenditure on the Klipgat tenement is associated with drilling the Meletse deposit. Allowing for some of that expenditure being associated with Meletse, and applying a PEM of 0.7 to 1.0 indicates a value for Aquila’s interest in these tenements of $3.0M to $4.3M with a preferred value of
$3.5M. For personal use only use personal For
6.2.2 Other South African iron ore exploration Aquila holds three exploration tenements in the Northern Cape Province: Kathu, Blackridge and Orange River covering 3,127 km2. The tenements form part of the joint venture with Rakana with Aquila holding a 74% interest. Exploration on these tenements is at an early stage and $3.1M has been spent on effective exploration. No Mineral Resources have been reported although an iron ore occurrence at Nauga on the
amcconsultants.com 83
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Orange River tenement is being investigated. Applying a PEM of 0.4 to 0.7 indicates a value for Aquila’s interest in these tenements of $0.9M to $1.6M with a preferred value of $1.3M.
AMC has based its valuation on the tenements listed in the South African Independent Tenement Report as
summarized in Appendix G. For personal use only use personal For
amcconsultants.com 84
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
7 Qualifications AMC is a firm of mineral industry consultants whose activities include the preparation of independent technical specialist’s reports, and due diligence reports on, and reviews of, mining and exploration projects for purposes related to equity and debt funding, and public reports. In these assignments, AMC and its subconsultants act as an independent party.
AMC has carried out three technical consulting assignments for Aquila in the period 2010 to 2012. In carrying out these consulting assignments, AMC and its subconsultants have acted as independent parties and have no business relationship with Aquila other than the carrying out of individual consulting assignments as engaged.
Neither AMC nor its subconsultants have any business relationship or association with Aquila, other than the carrying out of individual technical consulting assignments as engaged.
In 2012, AMC provided technical assistance to a third party that was contracted by Shanghai Baosteel Group Corporation to provide it with technical support concerning a project unrelated to Aquila. However, AMC and its subconsultants have not carried out technical or other consulting assignments for Baosteel Resources Australia Pty Ltd or Aurizon Operations Limited (the Bidders).
While some employees of AMC and its subconsultants may have small direct or beneficial shareholdings in Aquila, neither AMC nor the contributors to this report nor members of their immediate families have any interests in Aquila that could be reasonably construed to affect their independence. AMC has no pecuniary interest, association or employment relationship with Aquila.
Aquila will pay AMC a professional fee according to AMC’s normal per diem rates, for the preparation of this ITSR, plus reimbursement of out-of-pocket expenses. The fee is not contingent upon the outcome of the Bidders’ offer, and AMC will receive no other benefit for the preparation of this ITSR.
In a letter relating to our engagement, Aquila agreed to comply with those obligations of the commissioning entity under the VALMIN Code including that to the best of its knowledge and understanding, complete, accurate and true disclosure of all relevant material information will be made.
Aquila represented in writing that, to the best of its knowledge, it has provided AMC with all material information relevant to its mineral assets described in this ITSR.
AMC has not audited the Mineral Resources and Ore Reserves (including Coal Resources and Coal Reserves), mining and processing schedules, cost estimates or other information provided by Aquila. AMC has reviewed that information to the extent necessary to satisfy itself that the Production Cases presented in this report are based on reasonable grounds and assumptions, and that the information AMC has in relation to the valuation of the exploration properties, is sufficient.
Aquila has been provided with a draft of this ITSR to enable correction of any factual errors and notation of any material omissions.
This ITSR and the conclusions in it are effective at 20 June 2014. Those conclusions may change in the future with changes in relevant metal prices, exploration and other technical developments in regard to the operation, underground resource and exploration tenements and the market for mineral properties.
Aquila has provided AMC with indemnities in regard to damages, losses and liabilities related to or arising out of its engagement other than those arising from illegal acts, bad faith or negligence on its part or its
reliance on unauthorized statements from third parties. For personal use only use personal For This ITSR has been provided to Grant Samuel & Associates Pty Ltd (Grant Samuel) for the purposes of it forming its opinion and preparing its independent expert’s report (IER) in relation to the Bidders’ offer. AMC has given its consent for its report to be appended to the IER and for it to be provided to shareholders and has not withdrawn that consent before their lodgement with the Australian Securities & Investments Commission. Neither this ITSR nor any part of it may be used for any other purpose without written consent.
amcconsultants.com 85
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
The signatories to this report are corporate members of the AusIMM and bound by its Code of Ethics.
Yours faithfully
K Sommerville L J Gillett FAusIMM (CP) FAusIMM (CP) Principal Mining Engineer Director
For personal use only use personal For
amcconsultants.com 86
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Appendix A List of abbreviations
$ Australia dollars FLURP Final Land Use and Rehabilitation Plan $M Dollars million FOB Free on board % Percent g/t Grams per tonne 2004 JORC Australasian Code for Reporting of GPS global positioning system Code Exploration Results, Mineral Resources Grant Samuel Grant Samuel & Associates Pty Ltd and Ore Reserves, The JORC Code HBF Horizontal vacuum belt filtration 2004 Edition, Effective December 2004, HCL Harrow Creek Lower Prepared by the Joint Ore Reserves HCU Harrow Creek Upper Committee of the Australasian Institute HEMTS QLD Hetherington Exploration & Mining Title of Mining and Metallurgy, Australian Services (Qld) Institute of Geoscientists and Minerals Council of Australia (JORC) hrs Hours 2D Two-dimensional ICP-OES Inductively coupled plasma optical emission spectroscopy 3D Three-dimensional IER Independent expert's report AF Acid forming IOH Iron Ore Holdings AFC Armoured face conveyor IRTM Interactive Resource and Tenure AMC AMC Consultants Pty Ltd Mapping AMC Case 2 Two Longwall Scenario ITSR Independent Technical Specialist's AMD Acid and metalliferous drainage Report API API Management Limited IUCN International Union for the Conservation Aquila Aquila Resources Limited of Nature ARD Acid rock drainage km Kilometres Avontuur Avontuur Manganese project KMF Kalahari Manganese Field BIBO Bus in bus out kt Thousand tonnes BID Bedded iron deposits ktpa Thousand tonnes per annum Bidders Baosteel Resources Australia Pty Ltd LOI Loss on ignition and Aurizon Operations Limited LOM Life-of-mine BIF Banded iron formation LTCC Longwall top coal caving BMA BHP Billiton Mitsubishi Alliance LV Low volatile BSL Beam-stage loader M Million Capex Capital expenditure m Metres CC Coking coal M 64 Low to medium volatile CHPP Coal handling and preparation plant 2 m Square metre CID Channel iron deposits 3 m Cubic metres COG Cut-off grade Mbcm Million bank cubic metres CPF Central processing facility MDL Mineral Development Licences CSR Coke strength after reaction MDLa 519 Eagle Downs South Mineral CSS Closed side setting Development Licence DCF Discounted cash flow MECA Manganese export capacity allocation DFS Definitive Feasibility Study Mineral Assets Mineral assets of Aquila DM Dense medium ML Mining Lease DMC Dense medium cyclone ML 70389 Eagle Downs Mining Lease DMS Dense media separation MLa Mining Lease application dmt Dry metric tonnes mRL Reduced level DREA Dry rejects emplacement area Mt Million tonnes DSO Direct shipping ore Mtpa Million tonnes per annum DY Dysart NAF Non acid forming Eagle Downs Eagle Downs hard coking coal project NPV Net present value Eagle Downs Eagle Downs Pre-feasibility Study Offer Off-market takeover offer PFS OK Ordinary kriging EIA Environmental Impact Assessment OOM Order of magnitude EIS Environmental Impact Statement Opex Operating costs EM Plan Environmental Management Plan For personal use only use personal For oz Ounce EP Act State Environmental Protection Act PAF Potentially acid forming EPBC Act Environmental Protection and PB Push back or open pit stage Biodiversity Conservation Act PCI Pulverized coal injection EPBC Act Commonwealth Environment Protection PEC Pilbara Priority Ecological Community and Biodiversity Act 1999 PEM Prospectivity enhancement multiplier EPCM Engineering procurement and construction management PFS Pre-feasibility study EPCs Exploration permits for coal PPs Prospecting Permits Fe Iron Rangals Rangals Coal Measures
amcconsultants.com Appendix A - 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
RC Reverse circulation VALMIN Code Code for the Technical Assessment and ROM Run-of-mine Valuation of Mineral and Petroleum RPI Regional planning interest Assets and Securities for Independent SCA Strategic cropping land Expert Reports. The VALMIN Code 2005 Edition, Prepared by the VALMIN SS Supplementary Study Committee, a joint committee of the t Tonnes Australasian Institute of Mining and TC Thermal coal Metallurgy, the Australian Institute of TCC Top coal caving Geoscientists and the Mineral Industry TECs Threatened Ecological Communities Consultants Association with the TJV Thabazimbi Joint Venture participation of the Australian Securities TMM Total material movement and Investment Commission, the tpa Tonnes per annum Australian Stock Exchange Limited, the tph Tonnes per hour Minerals Council of Australia, the Petroleum Exploration Society of TSF Tailings storage facility Australia, the Securities Association of UCS Unconfirmed compressive strength Australia and representatives from the US$ United States Dollars Australian finance sector. VSI Vertical shaft impactor Washpool Washpool hard coking coal project
WHCC Washpool hard coking coal
WICET Wiggins Island
wmt Wet metric tonnes WPIOP West Pilbara Iron Ore Project Yancoal Yancoal Australia Ltd YOS Yield optimization study
For personal use only use personal For
amcconsultants.com Appendix A - 2
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Appendix B Report contributors
The contributors to this report include:
Name Qualifications Affiliations Involvement Kate Sommerville BEng (Geological), Post Graduate AMC Principal Mining Project Manager and mining Diploma Mining, Masters of Engineer aspects for iron ore and Business Administration manganese. Lawrie Gillett BEng (Mining) (Hons) AMC Director/Global Peer review. DipGeosc (Mineral Economics) Practice Leader – Corporate Consulting Brad Watson BEng (Hons) (Mining AMC Senior Mining Production and cost modelling. Engineering), BComm (Finance) Engineer Chris John BSc Agriculture (Hons), PhD AMC Environmental Environmental management and Subconsultant permitting for iron ore and manganese. Dean Carville B App Sc (App. Geology) AMC Geology Manager – Geology, Mineral Resources and Perth iron and manganese valuations. Principal Geologist Malcolm Dorricott BEng (Mining) AMC Principal Mining Peer review for coal aspects Engineer Peter Allen BEng (Environmental) AMC Principal Environmental management and Environmental Engineer permitting for coal Rob Chesher BSc Metallurgy (Hons) AMC General Manager – Metallurgy processing and Brisbane infrastructure aspects. Principal Consultant Bernard Vandeventer MBA, BComm AMC Subconsultant Coal production and mining Diploma (Mining) review including reference to geotechnical influence. Brian Povey MBA Tech Management AMC Subconsultant Metallurgy and processing of iron Diploma Business Management ore and manganese. BSc Engineering (Metallurgy) Fred Robins BSc (Geology) (Hons) AMC Subconsultant Geology and Mineral Resource estimates for coal. Paul Keleher BSc (Geology) AMC Subconsultant Coal quality aspect. Paul Leitinger BEng (Civil) (Hons) AMC Subconsultant Infrastructure, port and rail Postgraduate Diploma in aspects for West Pilbara iron ore Management project. Master of Business Administration Peter Dawson BEng (Mechanical) (Hons) AMC Subconsultant Infrastructure, port and rail aspects for West Pilbara iron ore project. Peter Stoker BSc (Geology) AMC Principal Geologist Coal valuations. Alison Keogh BSc (Geology) (Hons) AMC Principal Geologist Coal valuations. Kathy Zunica BSc (Geology and Geophysics) AMC Senior Geologist Coal valuations. (Hons) Clara Tetther BEng (Hons) AMC Subconsultant Coal port and rail aspects.
Paul Tribley BEng (Civil and Structural)/ (Hons) AMC Subconsultant Coal port and rail aspects. For personal use only use personal For
amcconsultants.com Appendix B -1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Appendix C Exploration Valuation methods
Various methods have been traditionally used to value mineral exploration tenements that may or may not include a Mineral Resource.
In relation to the development status of a mineral asset, the VALMIN Code12 provides the following categories: Exploration areas: properties where mineralization may or may not have been identified, but where a Mineral Resource has not been estimated. Advanced exploration areas: properties where considerable exploration has been undertaken and specific targets have been identified that warrant further detailed evaluation, usually by drill testing, trenching, or some other form of detailed geological sampling. A Mineral Resource may or may not have been estimated but sufficient work will have been undertaken on at least one prospect to provide a good understanding of the type of mineralization present and encouragement that further work may lead to estimation of a Mineral Resource. Pre-development projects: properties where Mineral Resources have been estimated and their extent determined (possibly incompletely), but where a decision to proceed with development has not been made. Development projects: properties for which a decision has been made to proceed with construction or production, but which are not yet commissioned or are not yet operating at design levels. Operating mines: properties, particularly mines and processing plants which have been commissioned and are in production.
The valuation of exploration projects, particularly those for which it is not possible to quantify Mineral Resources, is very subjective. There are, however, several generally accepted procedures to value exploration projects and AMC has used such methods as appropriate to arrive at balanced judgments of value.
Where possible, AMC attempts to use more than one method before selecting the valuation appropriate to that project. Values have been rounded, outliers in contributing estimates sometimes excluded. AMC has considered the following methods of valuation:
The past expenditure method A prospectivity enhancement multiplier (PEM) generally between 0.5 and 3.0 is applied to past expenditure which we judge to be effective in regard to future prospectivity.
The yardstick value method Rules of thumb or yardstick values can be used for properties where a Mineral Resource has been quantified, particularly in the case of gold. A value per contained ounce of gold or gold equivalent (based on treatment recoveries and net smelter return factors) is assigned to an actual Mineral Resource or to a preliminary mineralization estimate. The yardstick values AMC has considered are based on our assessment of transactions in recent years.
Actual or comparable transaction method A value is determined by reference to either actual transactions for the property in question or to recent transactions for projects considered to be similar to those under review. Comparable transactions are
normally converted to a value per unit area. For personal use only use personal For
12 Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports. The VALMIN Code 2005 Edition, Prepared by the VALMIN Committee, a joint committee of the Australasian Institute of Mining and Metallurgy, the Australian Institute of Geoscientists and the Mineral Industry Consultants Association with the participation of the Australian Securities and Investment Commission, the Australian Stock Exchange Limited, the Minerals Council of Australia, the Petroleum Exploration Society of Australia, the Securities Association of Australia and representatives from the Australian finance sector.
amcconsultants.com Appendix C - 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Joint venture terms method Many transactions on exploration tenements are of a farm-in nature and AMC assesses a "cash equivalent" value for them by assessing from the terms the "deemed expenditure" on the property at the time of the deal, discounted by a time and probability factor for the likelihood that the farm-in will complete its earning requirement. AMC adjusts the resulting value for any other terms of the joint venture or for the results of work carried out since the commencement of the farm-in.
Expected value method Expected values are estimated where it is reasonably possible to target a range of economic parameters that can be applied to a project that may result from ongoing exploration, usually with allowance for the costs of that ongoing exploration and with a probability or risk factor for the chances of that exploration being successful.
Values for exploration properties vary widely with time and also with the nature of the deal, the purpose of the valuation and/or the strategic value of the property to the hypothetical buyer. A cash transaction will normally be at the low end of a value range obtained by methods discussed above. Share market values, as in a float, will often be at the higher end.
Valuation of mineral tenements is normally carried out for groups of tenements as small tenements may have almost no stand-alone value. An individual tenement holds its value as part of a group of tenements covering a larger area with exploration potential or covering a complete Mineral Resource rather than part of it.
For personal use only use personal For
amcconsultants.com Appendix C - 2
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty ForLtd personal use only 214034
Appendix D Coal exploration comparable transactions
Transaction Date Target Acquirer Seller Interest Type of Mine Stage of Coal Basin Coal Consideration Implied Reserves Resources Implied Implied Tenement Implied Acquired Development Type 100% Value of Value of Area Value by Value Reserves Resources Area (%) ($M) ($M) (Mt) (Mt) ($M/t) ($M/t) (km2) ($M/km2) Cockatoo / Anglo American 7/07/2010 Collingwood, Cockatoo Coal Anglo American 51 - - - TC 106 207 - 606 - 0.340 - - (Surat Basin) (Jul 10) Tarrom and Limited plc Ownaview China National/ Metro 1/04/2010 Columboola China National Metro Coal 51 Underground Exploration Surat TC 30 59 na 1,290 na 0.046 896 0.066 project Coal Company Cockatoo Coal / Dingo 1/02/2007 Dingo Cockatoo Coal Independent 100 Open pit Exploration Bowen PCI,TC 2 2 - - - - 189 0.011 Coal Conarco 1/04/2006 7 EPC's Excel Coal Conarco 100 - Exploration - TC, CC? 14 14 - - - - 6,700 0.002 Sojitz/Yamala 1/03/2007 Yamala Sojitz Northern Energy 49 Open pit Exploration Bowen PCI,TC 13 26 - - - - 230 0.113 MetroCoal / EPC 1165 2010 EPC 1165 MetroCoal CCIEC JV 0 - - - - 30 29 - Exploration - 0.013 - - target 2.5 Bt to 3.5 Bt TC Gastar / VCR 2006 EL 4416 Gastar CBM Resources 50 Open pit and Exploration LaTrobe Brown 30 22 na Exploration - 0.002 ~100 0.22 (Victoria) Exploration Ltd. PTY LTD and Technology Valley Coal target 10 Bt Victoria Coal Victoria brown coal Resources, LLC
Enterprise Bandanna 2007 EPCs 892 & Enterprise Arcadia Coal Pty 45 Underground Exploration Bowen & TC 11 9 - Inferred 273 Mt - 0.034 - - 1131, EPCa1204 Energy NL Ltd & Springsure Galilee TC Creek Coal Pty Ltd Wavenet JD 2011 EPCs 2525, Wavenet JD Minerals Pty 100 Underground Exploration Hillsborough Low rank 0 0 - 15 Mt ? - 0.028 - - 2526, 2529 and International Ltd and small Coal & Eromanga 2530 Limited Resource & Galilee Qld
Wavenet/Various projects 1/07/2008 Oxley/ Wavenet Ansett 50 - Advanced Bowen TC 3 6 - - - - 1,451 0.004 Rathdowney Technology Resources and Exploration Industries Subtotal - Minimum 0.002 189 0.002 Subtotal - Maximum 0.340 6,700 0.220 Subtotal - Average 0.077 1,893 0.069
amcconsultants.com Appendix D- 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Appendix E Iron ore exploration comparable transactions
Date Seller Purchaser Project Consideration (100%) Mineral Resource Implied Value (100 terms) ($) ($/t Fe) October 2010 Talisman Mining Limited E-Com Multi Limited Wonmunna 41.35M 78.3 Mt at 56% Fe 0.93 October 2010 Cazaly Resources Limited St Istvan Gold Limited Hamersley 8M 143 Mt at 52.6% Fe 0.26 April 2012 Iron Ore Holdings Mineral Resources Limited Lamb Creek 42M 25 Mt at 55% Fe 1.63 March 2012 Iron Ore Holdings Mineral Resources Limited Phil's Creek 21M 15 Mt at 56% Fe 2.20 March 2012 Hancock Prospecting Limited POSCO/Marubeni Consortium Roy Hill 3.2B 2.3 Bt at 59% Fe 9.43 September 2011 Iron Ore Holdings Hamersley Iron Pty Ltd Koodaideri South 32M 106 Mt at 58.6% Fe 0.51 July 2012 Murchison Metals Dragon Energy Rocklea 3.2M 89 Mt at 50% Fe 0.07 September 2013 Iron Ore Holdings Maiden Iron Pty Ltd North Marillana 7.75M 15.6 Mt at 54% Fe 0.92
October 2013 Mindax Limited Perpetual Mining Holding Limited Mt Forrest 52.3M 21 Mt at 44% Fe 11.10 For personal use only use personal For
amcconsultants.com Appendix E - 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Appendix F Western Australian iron ore tenement list
Tenement Group Name Aquila Date Expiry Area Blocks Rent Rates Expenditure Interest Granted Date Commitment (%) (km2) ($) ($) ($) E08/1135 Mt Stuart Yanks Bore 35 5/06/00 4/06/12 34.9 11 5,367 3,497 70,000 E08/1227 Red Hill Cardo/Kens Bore 30 8/04/02 7/04/13 108.9 33 16,101 10,490 99,000 E08/1283 Red Hill Cane River 30 25/05/05 24/05/14 209.1 66 32,201 20,980 198,000 E08/1289 Red Hill Red Hill North 30 19/10/05 18/10/12 220.7 70 34,153 22,251 210,000 E08/1292 Mt Stuart Mount Stuart 35 5/06/03 4/06/12 117.1 37 18,052 11,761 111,000 E08/1293 Red Hill White Gate 30 19/10/05 18/10/12 128.2 43 20,980 13,668 129,000 E08/1294 Red Hill Red Hill North 30 30/05/05 29/05/14 120.7 38 18,540 12,079 114,000 E08/1295 Red Hill Red Hill 30 25/05/05 24/05/14 47.6 15 7,319 4,768 70,000 E08/1330 Mt Stuart Catho Well 35 5/06/03 4/06/13 119.2 39 19,028 12,397 117,000 E08/1341 Mt Stuart Cardo Bore 35 25/06/03 24/06/12 41.2 13 - 4,132 70,000 E08/1430 Red Hill Red Hill 30 19/10/05 18/10/12 101.5 32 15,613 10,172 96,000 E08/1473 Red Hill Red Hill 30 19/10/05 18/10/12 57.1 18 8,782 5,722 70,000 E08/1516 Red Hill Red Hill/Mount Stuart 30 25/01/06 24/01/13 104.5 33 16,101 5,540 99,000 E08/1537 Red Hill Red Hill 30 17/07/06 16/07/13 6.3 2 976 530 50,000 E08/2089 API Chuerdoo Pool 50 Pending - 38.4 12 - 448 - E08/2140 API Cheels Plains North 50 17/11/11 16/11/16 15.8 5 950 398 15,000 E45/2603 API Mount Grant 50 2/10/05 1/10/12 54.6 18 8,782 1,492 70,000 E45/2647 API Lever Well 50 2/10/05 1/10/12 57.2 18 8,782 1,492 70,000 E45/3562 API Yowarda Pool 50 26/03/12 25/03/17 31.8 10 1,899 393 20,000 E45/4066 API Hillside 50 21/08/13 20/08/18 31.8 10 1,221 393 20,000 E47/1129 Mt Elvire Balmoral 50 16/4/04 15/4/13 109.7 35 17,077 11,126 105,000 E47/1130 Mt Elvire Balmoral 50 24/4/03 23/4/13 142.7 45 21,956 14,304 135,000 E47/1141 Red Hill Upper Cane/Trinity 30 16/06/05 15/06/14 190.0 60 28,530 19,072 180,000 E47/1169 Yalleen Yallen 50 23/01/06 22/01/13 207.6 66 32,201 9,677 198,000 E47/1170 Yalleen Yallen 50 23/01/06 22/01/13 202.8 70 34,153 10,264 210,000 E47/1171 Yalleen Yallen 50 23/01/06 22/01/13 191.5 63 30,738 9,237 189,000 E47/1255 Mt Elvire Balmoral 50 2/08/12 1/08/17 222.6 70 8,547 5,569 70,000 E47/1256 Mt Elvire Balmoral 50 6/01/06 5/01/13 100.3 35 17,077 5,876 105,000 E47/1257 Mt Elvire Balmoral 50 6/07/10 5/07/15 219.4 69 13,103 5,489 103,500 E47/1258 Mt Elvire Balmoral 50 7/02/14 6/02/19 222.6 70 8,547 5,569 70,000 E47/1259 Mt Elvire Balmoral 50 7/02/14 6/02/19 222.6 70 8,547 5,569 70,000 E47/1262 Mt Elvire Hamersley Range 50 6/01/06 5/01/13 220.2 70 34,153 11,751 210,000 E47/1263 Mt Elvire Hamersley Range 50 6/01/06 5/01/13 195.3 68 33,177 11,415 204,000 E47/1264 Mt Elvire Hamersley Range 50 6/01/06 5/01/13 189.1 66 32,201 11,080 198,000 E47/1265 Mt Elvire Hamersley Range 50 6/01/06 5/01/13 210.7 70 34,153 11,751 210,000 E47/1266 Mt Elvire Hamersley Range 50 7/02/14 6/02/19 44.6 15 1,832 1,591 20,000 E47/1267 Mt Elvire Hamersley Range 50 6/07/10 5/07/15 206.7 65 12,344 5,171 97,500 E47/1278 Mt Elvire Hamersley Range 50 7/02/14 6/02/19 222.6 70 8,547 5,569 70,000 E47/1279 Mt Elvire Hamersley Range 50 27/04/10 26/04/15 222.2 70 18,036 5,569 105,000 E47/1280 Mt Elvire Hamersley Range 50 20/01/10 19/01/15 221.1 70 18,036 5,569 105,000 E47/1281 Mt Elvire Hamersley Range 50 7/04/11 6/04/16 222.1 70 13,293 5,569 105,000 E47/1282 Mt Elvire Hamersley Range 50 7/04/11 6/04/16 222.6 70 13,293 5,569 105,000 E47/1283 Mt Elvire Hamersley Range 50 20/01/10 19/01/15 220.2 70 18,036 5,569 105,000 E47/1284 Mt Elvire Hamersley Range 50 7/04/11 6/04/16 222.6 70 13,293 5,569 105,000 E47/1285 Mt Elvire Hamersley Range 50 20/01/10 19/01/15 222.0 70 18,036 5,569 105,000 E47/1286 Mt Elvire Hamersley Range 50 20/01/10 19/01/15 221.4 70 18,036 5,569 105,000 E47/1287 Mt Elvire Hamersley Range 50 20/01/10 19/01/15 219.8 70 18,036 5,569 105,000 E47/1376 API Mount Bruce 50 30/11/05 29/11/12 194.3 70 34,153 11,751 210,000 E47/1411 API Turner 50 23/03/05 22/03/14 74.0 29 14,149 9,218 87,000 E47/1412 API Rocklea 50 23/03/05 22/03/14 50.3 16 7,806 5,086 70,000 E47/1413 API Hardey 50 23/03/05 22/03/14 50.4 16 7,806 5,086 70,000 E47/1414 API Hancock Range 50 23/03/05 22/03/14 56.8 18 8,782 2,826 70,000
For personal use only use personal For E47/1415 API Austin Creek East 50 23/03/05 22/03/14 63.3 20 9,758 6,357 70,000 E47/1416 API Nammuldi 50 23/03/05 22/03/14 34.7 11 5,367 3,497 70,000 E47/1417 API Meteorite Bore 50 23/03/05 22/03/12 40.3 14 6,831 4,450 70,000 E47/1495 API June 50 18/09/07 17/09/12 136.0 43 20,980 7,219 86,000 E47/1503 Mt Elvire Balmoral 50 7/02/14 6/02/19 206.7 65 7,937 5,171 65,000 E47/1504 Mt Elvire Hamersley Range 50 4/05/11 3/05/16 9.5 3 570 239 20,000 E47/1505 Mt Elvire Hamersley Range 50 4/05/11 3/05/16 15.9 5 950 398 20,000 E47/1693 Red Hill Duck Creek/Trinity 30 29/11/06 28/11/16 150.6 48 23,419 13,430 144,000
amcconsultants.com Appendix F - 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Tenement Group Name Aquila Date Expiry Area Blocks Rent Rates Expenditure Interest Granted Date Commitment (%) (km2) ($) ($) ($) E47/2205 API Horse Well 50 20/12/10 19/12/15 28.4 9 1,709 716 30,000 E47/2332 API Cheela Plains Central 50 28/03/11 27/03/16 15.8 5 950 398 20,000 E47/2501 API Beasley River 50 Pending - 53.6 17 - 5,404 - E47/2633 API Byong 50 Pending - 31.8 10 - 796 - E47/2653 API Mt Virchow 50 Pending - 226.7 71 - - - E52/1747 API Snowy Mountain 50 20/09/05 19/09/12 215.1 70 34,153 13,252 210,000 E52/1775 API Western Creek 50 7/10/05 6/10/12 55.0 18 8,782 2,826 70,000 E52/1776 API Innawalley Pool 50 7/10/05 6/10/12 16.9 8 3,903 1,256 70,000 E52/2596 API Windell Pool 50 16/11/12 15/11/17 25.1 8 977 636 20,000 L08/67 Red Hill Central Haul Road 30 13/02/12 12/02/33 0.3 n/a 413 - - L08/68 Red Hill Mine Village/Airstrip 30 22/05/12 21/05/33 8.0 n/a 11,443 - - L08/69 Red Hill Mine Access Road 30 Pending - 13.7 n/a - - - L08/74 API Midway Camp 50 Pending - 0.8 n/a - - - L08/75 API River Camp 50 Pending - 1.3 n/a - - - L08/79 Red Hill Mount Stuart/Red Hill Road 30 Pending - 3.8 n/a - - - L47/562 API Bunyip Camp 50 Pending - 3.4 n/a - - - M08/480 Mt Elvire Kens Bore East 50 Pending - 11.6 n/a - 24,498 - M08/481 Mt Stuart Catho Well 35 Pending - 36.1 n/a - 75,890 - M08/482 Mt Stuart Cardo Bore 35 Pending - 16.1 n/a - 33,792 - M08/483 Red Hill Cochrane/Jewel 30 Pending - 31.9 n/a - 67,016 - M08/484 Red Hill Kens Bore (KB UC CN CE) 30 Pending - 100.1 n/a - 210,573 - M08/485 Red Hill Cardo West 30 Pending - 17.6 n/a - 36,378 - M47/1346 Red Hill Madala Bore 30 Lapsed 29/11/06 - - - - M47/1347 Red Hill Madala Bore 30 Lapsed 29/11/06 - - - - M47/1348 Red Hill Madala Bore 30 Lapsed 29/11/06 - - - - M47/1349 Red Hill Madala Bore 30 Lapsed 29/11/06 - - - - M47/1350 Red Hill Madala Bore 30 Lapsed 29/11/06 - - - - M47/1351 Red Hill Madala Bore 30 Lapsed 29/11/06 - - - - M47/1352 Red Hill Trinity Bore 30 Lapsed 29/11/06 - - - - M47/1472 Red Hill Trinity Bore/Catho North 30 Pending - 51.4 n/a - 108,062 - P47/1653 API Mt Elvire 50 Pending - 1.0 n/a - 530 - P47/1654 API Mt Elvire 50 Pending - 0.5 n/a - 530 - P47/1655 API Mt Elvire 50 Pending - 1.8 n/a - 530 - P47/1656 API Hamersley Range 50 Pending - 0.3 n/a - 530 - P47/1657 API Hamersley Range 50 Pending - 0.2 n/a - 530 - P47/1658 API Hamersley Range 50 Pending - 0.2 n/a - 530 -
For personal use only use personal For
amcconsultants.com Appendix F - 2
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
Appendix G South African tenement list
Name PR Number Area Commencment Expiry Date Renewal Status (ha) Date Date Renewed Accepted
Thabazimbi Donkerpoort LP30/5/1/1/2/1301 PR 817 22/10/2008 21/10/2013 16/07/2013 02/08/2013 Pending Klipgat LP30/5/1/1/2/613 39,928 18/07/2007 17/07/2012 12/04/2012 13/07/2012 Pending Vlaknek LP30/5/1/1/2/614PR 17,465 14/11/2006 13/11/2011 8/03/2012 30/11/2012 Pending Rotterdam LP 30/5/1/1/2/0547 13,488 18/07/2007 17/07/2012 17/04/2012 15/02/2013 Pending Wachteenbietjiesdraai LP 30/6/1/1/2/1730 1,032 25/11/2009 24/11/2014 14/08/2014 - Active Northern Cape Avontuur NC/2/478 37,000 28/02/2007 27/02/2012 15/12/2011 28/02/2012 Pending Blackridge NC30/5/1/1/2/1023 88,330 22/12/2009 21/12/2014 09/2014 - Active Kathu NC5/1/1//2/0479 40,834 28/02/2007 27/02/2012 15/12/2011 28/02/2012 Pending
Orange River NC30/5/1/1/2/1048 146,537 11/06/2008 10/06/2013 25/03/2013 18/04/2013 Pending For personal use only use personal For
amcconsultants.com Appendix G - 1
Aquila – Independent Technical Specialist's Report Grant Samuel & Associates Pty Ltd 214034
AMC Offices Adelaide Toronto Level 1, 4 Greenhill Road 90 Adelaide Street West, Suite 300 Wayville SA 5034 Australia Toronto, Ontario M5H 3V9 Canada T +61 8 8201 1800 T +1 416 640 1212 F +61 8 8201 1899 F +1 416 640 1290 [email protected] [email protected]
Brisbane Vancouver Level 21, 179 Turbot Street Suite 202, 200 Granville Street Brisbane Qld 4000 Australia Vancouver BC V6C 1S4 Canada T +61 7 3230 9000 T +1 604 669 0044 F +61 7 3230 9090 F +1 604 669 1120 [email protected] [email protected]
Melbourne Maidenhead Level 19, 114 William Street Registered in England and Wales Melbourne Vic 3000 Australia Company No. 3688365 T +61 3 8601 3300 Level 7, Nicholsons House F +61 3 8601 3399 Nicholsons Walk, Maidenhead [email protected] Berkshire SL6 1LD United Kingdom T +44 1628 778 256 Perth F +44 1628 638 956 9 Havelock Street [email protected] West Perth WA 6005 Australia Registered Office: 11 Welbeck Street T +61 8 6330 1100 London, W1G 9XZ United Kingdom F +61 8 6330 1199 [email protected]
amcconsultants.com
For personal use only use personal For
amcconsultants.com
Annexure B Taxation Report
For personal use only use personal For
Target’s Statement
Ernst & Young Tel: +61 8 9429 2222 11 Mounts Bay Road Fax: +61 8 9429 2436 Perth WA 6000 Australia ey.com/au GPO Box M939 Perth WA 6843
The Directors 20 June 2014 Aquila Resources Limited Level 2, Aquila Centre 1 Preston Street COMO WA 6152
Independent Income Tax Opinion
Dear Directors
We have been requested by Aquila Resources Limited (Aquila) to provide a third party tax opinion to you in respect of the general income tax and capital gains tax (CGT) implications to the shareholders of Aquila (Aquila Shareholders) in respect of the proposed takeover of Aquila by Baosteel Resources Australia Pty Ltd (Baosteel) and Aurizon Operations Limited (Aurizon) (known as the Bidders) for cash consideration totaling $3.40 per share (the Offer). This tax opinion should be read in conjunction with the remainder of the Target’s Statement.
Introduction
The following is a general overview of the Australian tax implications for Aquila Shareholders who accept the Offer.
This overview does not constitute financial product advice as defined in the Corporations Act. This overview is confined to Australian tax issues and is only one of the matters you need to consider when making a decision about the Offer.
Please note, the tax comments set out below are necessarily general and limited in nature, are based on a number of simplifying assumptions, and do not take into consideration the specific circumstances of each Aquila Shareholder. Specifically, the comments set out below are relevant only to those Aquila Shareholders who acquired their Shares after 21 September 1999 and hold their Shares on capital account.
The tax comments do not consider the tax implications arising in respect of any Aquila Shareholders who:
• hold their Shares for the purposes of speculation or a business of dealing in securities or otherwise hold their Shares on revenue account or as trading stock
• are banks, insurance companies, tax exempt entities, superannuation funds
• have made any of the tax timing method elections pursuant to the taxation of financial For personal use only use personal For arrangement rules in Division 230 of the Income Tax Assessment Act 1997 (Cth) in relation to gains and losses on their Shares
• acquired their Shares in respect of their employment with Aquila (or an associated company)
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation
2
Further this overview does not contemplate the Australian taxation implications that may arise from the exercise of Aquila options, or the issue of Aquila shares on the vesting of Aquila Performance Rights or Aquila Share Appreciation Rights.
Aquila Shareholders who are not Australian tax residents (whether or not they are also residents, or are temporary residents, of Australia for tax purposes) should also take into account the tax implications of accepting the Offer under the tax law of their country of residence, as well as under Australian law.
The following description is based upon the Australian law and administrative practice in effect at the date of this Target’s Statement, but it is general in nature and not intended to be an authoritative or complete statement or analysis of the Australian taxation laws applicable to the particular circumstances of every Aquila Shareholder. In addition, these laws are subject to change periodically as is their interpretation by the courts.
Tax laws are complicated and there could be implications for Aquila Shareholders in addition to those described below. As noted above the information outlined below is general in nature and the individual circumstances of each shareholder may affect the tax implications of the investment of that shareholder. Aquila Shareholders should seek appropriate independent professional advice that considers the tax implications in respect of their own specific circumstances. We disclaim all liability to any shareholder or any party for all costs, loss, damage and liability that the shareholder or other party may suffer or incur arising from or relating to or in any way connected with the contents of this opinion or the provision of this opinion to the shareholder or other party or the reliance on this opinion by the shareholder or other party.
This opinion does not constitute an endorsement of the Target’s Statement or a recommendation as to whether Aquila Shareholders should accept the Offer. EY expresses no opinion and gives no assurance in respect of the Target’s Statement.
Australian resident Shareholders a. Shareholders who accept the Offer
Acceptance of the Offer will involve the disposal by Aquila Shareholders of their Shares by way of transfer to the Bidders. This disposal of the Shares will give rise to a CGT event for Aquila Shareholders.
The date of disposal for CGT purposes will be the later of the date the contract to dispose of the Shares is formed (which will be the date of acceptance if you decide to accept the Offer) or when the Offer contract is formed (i.e. when the Defeating Conditions in sections 12.7(b) and 12.7(c) of the Bidder’s Statement are either satisfied or waived).
b. Compulsory acquisition
If an Aquila shareholder does not dispose of their Shares under the Offer and their Shares are compulsorily acquired in accordance with Part 6A.1 of the Corporations Act, those Shareholders will For personal use only use personal For also be treated as having disposed of their Shares for CGT purposes.
The date of disposal for CGT purposes for these Shareholders will be the date when the Bidder becomes the owner of the Shares.
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation
3
c. Calculation of gain or loss
Australian resident Aquila Shareholders will make a capital gain on the disposal of their Shares under the Offer, to the extent that the capital proceeds from the disposal of the Shares are more than the cost base of those Shares. Conversely, you will make a capital loss to the extent that the capital proceeds are less than the reduced cost base of those Shares.
The CGT cost base of the Shares held by each Aquila Shareholder will generally include the consideration paid to acquire the Shares including any incidental costs of acquisition such as brokerage and stamp duty. However, there are circumstances where this may not be the case and we recommend that you speak to your tax adviser to confirm the cost base of your Shares. The reduced cost base of your Shares is usually determined in a similar, but not identical, manner and there are some limitations on including certain related costs.
The capital proceeds received by Aquila Shareholders in respect of the disposal of the Shares for CGT purposes will be $3.40 per Share.
If you make a capital gain from the disposal of your Aquila Shares, the gain (after first offsetting available capital losses) will be included in your assessable income. A CGT discount may be available on the gain (after first offsetting any capital losses) if you held the Aquila Shares for more than 12 months before the time you accept the Offer or your Shares are compulsorily acquired.
You may be entitled to the CGT discount if:
(i) you are an Australian resident individual, trust or complying superannuation fund (ii) you have held your Aquila Shares for at least 12 months (not including date of acquisition and disposal) (iii) you make a capital gain from the disposal of your Aquila Shares
The CGT discount will result in:
(i) your capital gain being reduced by 50%, if you are an individual or a trust (excluding a complying superannuation entity) (ii) your capital gain being reduced by 33⅓%, if you are a complying superannuation fund.
No CGT discount is available for companies.
Aquila Shareholders should seek their own advice as to the tax consequences of disposing of their Shares, in particular as to the availability of the discount CGT concession.
Non-resident Shareholders
For an Aquila Shareholder who:
• is not a resident of Australia for Australian tax purposes For personal use only use personal For
• does not hold their Shares in carrying on a business through a permanent establishment in Australia
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation
4
the disposal of Shares will generally only result in Australian CGT implications if:
• that Shareholder together with its associates (if any) beneficially held 10% or more of the Shares at the time of disposal or for any continuous 12 month period within 2 years preceding the disposal
• more than 50% of Aquila’s value is due to direct or indirect interests in Australian real property, which is defined to include mining and exploration leases and licences.
A Shareholder that, together with its associates, owns, or has for any continuous period within 2 years owned, 10% or more of the issued share capital in Aquila should obtain independent advice as to the tax implications of accepting the Offer and whether any protection will be available under a relevant double tax treaty.
A disposal of Aquila Shares by an individual non-tax resident will generally not be eligible for the CGT discount, however, individual non-tax residents may be partially eligible for the CGT discount where they acquired their shares before 8 May 2012.
Stamp duty and Goods and Services tax
The Bidders will pay the stamp duty (if any) payable in Australia on the transfer of Aquila Shares. Holders of Aquila Shares should not be liable for GST in respect of a disposal of those Shares as the supply of shares is input taxed (exempt) from GST in Australia.
Aquila Shareholders may be charged GST on costs (such as advisor fees) that relate to their participation in the Offer. Aquila Shareholders may be entitled to input tax credits or reduced input tax credits for such costs, but should seek independent professional advice in relation to their individual circumstances.
Yours sincerely
Ernst & Young
For personal use only use personal For
A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation
Annexure C Key Announcements
Date Description
19/06/2014 AZJ: Joint bid for Aquila – Notice of Change of Interests
19/06/2014 Notice of change of interest under IAF
18/06/2014 AZJ: Baosteel & Aurizon welcome Aquila recommendation
18/06/2014 MIN: Terminates discussions with Aquila
18/06/2014 Shareholder update
16/06/2014 Trading Halt
16/06/2014 Ceasing to be a substantial holder
16/06/2014 Form605 - Notice of ceasing to be a substantial holder
13/06/2014 Takeover Offer Development
13/06/2014 Aurizon - Joint off-market bid for Aquila Resources Limited
12/06/2014 CUL: Land Access Agreements Executed,West Pilbara WA
12/06/2014 Becoming a substantial holder from MIN
12/06/2014 MIN: Mineral Resources and Aquila Resources West Pilbara Iron
11/06/2014 Listing Rule 5.16 Clarification
11/06/2014 Significant Share Transaction
11/06/2014 Extension of Executive Services Agreement
11/06/2014 West Pilbara Iron – Native Title Agreements executed
06/06/2014 AZJ: Joint off-market bid for Aquila – Completion of dispatch
05/06/2014 Despatch of Bidders’ Statement
05/06/2014 Joint off-market bid for Aquila – Supplementary and Dispatch
29/05/2014 Takeover Offer – Notice of Satisfaction of FIRB Condition For personal use only use personal For
29/05/2014 AZJ: Joint off-market bid for Aquila – FIRB conditions
27/05/2014 AZJ: Notice of record date – Aquila Resources
Target’s Statement
Date Description
15/05/2014 Change in substantial holding from AZJ
15/05/2014 Change in substantial holding notice
14/05/2014 Receipt of Bidder’s Statement from Baosteel and Aurizon
14/05/2014 AZJ: Joint off-market bid for Aquila – Bidders’ Statement
14/05/2014 Bidders’ Statement received from Baosteel and Aurizon
05/05/2014 Baosteel and Aurizon – Intention to Make a Takeover Offer
05/05/2014 Change in Substantial holding from Baosteel Resources
05/05/2014 Receipt of Takeover Proposal from Baosteel and Aurizon
05/05/2014 Initial substantial holder notice from Aurizon Holdings Ltd
05/05/2014 AZJ: Joint offer announcement & investor presentation
05/05/2014 AZJ: Joint off-market bid for 100% share capital of Aquila
29/04/2014 March 2014 Quarterly Activities and Cashflow Report
15/04/2014 Corporate Presentation April 2014
15/04/2014 Washpool Hard Coking Coal Project Supplementary Study
14/04/2014 Eagle Downs Coal Project- Settlement of Litigation with Vale
21/03/2014 Change in substantial holding for CUL
05/03/2014 31 December 2013 Half Yearly Financial Report and Accounts
03/03/2014 CUL: Exploration Update - Iron Ore
12/02/2014 Addendum to December 2013 Quarterly Report
10/02/2014 Appointment of Additional Independent Non-Executive Director
24/01/2014 December 2013 Quarterly Activities and Cashflow Report
16/01/2014 Corporate Presentation - 2014 A Year of Possibility
23/12/2013 Change in substantial holding
23/12/2013 Form 604Notice of change of interests of substantial holder For personal use only use personal For
20/12/2013 Change in substantial holding
19/12/2013 Baosteel Increases Shareholding in Aquila
Target’s Statement
Date Description
16/12/2013 Eagle Downs Hard Coking Coal Project - Reserve Categories
11/12/2013 WDS Limited wins $142.8M Eagle Downs Drift Contract
11/12/2013 Eagle Downs - Drifts Construction Contract Awarded
02/12/2013 New Company Constitution
29/11/2013 Results of 2013 Annual General Meeting
29/11/2013 2013 Annual General Meeting Presentation
29/11/2013 Chairman's Address to Shareholders
18/11/2013 Change in substantial holding
13/11/2013 Supplementary AGM Circular
08/11/2013 Resignation and Appointment of Non-Executive Directors
28/10/2013 Annual Report to shareholders
28/10/2013 Notice of Annual General Meeting/Proxy Form
24/10/2013 Resignation and Appointment of Non-Executive Director
22/10/2013 Quarterly Activities and Cashflow Report
27/09/2013 Appendix 3B - Long Term Incentive Plan
20/09/2013 Avontuur Project - Alleged overlapping prospecting right
13/09/2013 Corporate Presentation - Annual Financial Results 2013
13/09/2013 June 2013 Financial Report For personal use only use personal For
Target’s Statement
Annexure D Reserves and Resources
Eagle Downs Hard Coking Coal Project
Reserve The project area contains an estimated JORC Code 2004 Reserve of 254.1Mt (March 2011). Seam Proved (Mt) Probable (Mt) Total (Mt) Harrow Creek Upper Seam 60.1 13.5 73.6 Harrow Creek Lower Seam 91.1 21.9 113.0 Dysart Seam 55.4 12.1 67.5 Total 206.6 47.5 254.1
Resource The project area contains an estimated JORC Code 2004 Resource of 959Mt (January 2011). Total Total Measured & Measured Measured Indicated Indicated Inferred Indicated & Seam (Mt) (Mt) (Mt) (Mt) Inferred (Mt) Q 73 20 93 15 108 HCU 123 36 158 31 189 HCL 281 70 351 49 400 HCL – “PCI” – 3 3 8 11 DY 164 13 177 16 193 DY – “PCI” 7 30 37 22 58 Total 648 171 819 140 959
Washpool Hard Coking Coal Project
Reserve The project area contains an estimated JORC Code 2004 Reserve of 108.3Mt (May 2010). 17 JORC Classification Mt Proved 94.7 Probable 13.5 Total 108.3
Resource The project area contains an estimated JORC Code 2004 Resource of 196.7Mt (July 2011). JORC Classification Mt Measured 124.9 Indicated 9.7 Inferred 62.1 Total 196.7
Walton PCI Coal Project Resource The project area contains an estimated JORC Code 2004 Resource of 46.6Mt (March 2013). JORC Classification Rangals (Mt) Burngroves (Mt) Total (Mt) Measured 14.4 – 14.4 Indicated 3.1 – 3.1 Inferred 10.0 19.1 29.1 For personal use only use personal For Total 27.5 19.1 46.6
17 Washpool JORC Reserve based upon Resource Statement issued May 2010.
Target’s Statement
Talwood Coking Coal Project Resource The project area contains an estimated JORC Code 2004 Resource of 434.9Mt (March 2013). Upper Vermont Goonyella Goonyella Total JORC Classification Leichhardt (Mt) (Mt) Upper (Mt) Middle (Mt) (Mt) Measured 46.6 31.3 – – 77.9 Indicated 31.8 44.8 12.5 18.5 107.6 Inferred 6.8 26.9 92.5 123.1 249.3 Total 85.2 103.0 105.0 141.6 434.9
West Pilbara Iron Stage 1 Reserve The Stage 1 project area contains an estimated JORC Code 2004 Reserve of 445Mt (December 2010).
JORC Classification Mt Fe % SiO2 % AL2 O3% P % Lol % Proved 166 58.0 5.11 3.38 0.08 7.99 Probable 279 56.5 6.13 3.48 0.06 8.90 Total 445 57.1 5.75 3.44 0.07 8.56
Resource West Pilbara Iron and wider Pilbara tenement areas contains estimated JORC Code 2004 Resources totalling 2,233Mt 18 (April 2013).
West Pilbara Iron – Channel Iron Deposits 19
JORC AL2 Joint Venture Classification Mt Fe % SiO2 % O3% P % S % Mn % MgO % Lol %
API JV - Mt Elvire (API Measured 82 57.9 5.16 3.83 0.072 0.020 0.025 0.072 7.72 JV 100%) Indicated 34 57.2 5.70 3.68 0.075 0.014 0.020 0.079 8.33 Inferred 1,148 55.5 7.29 3.47 0.073 0.014 0.021 0.073 9.27 Total 20 1,264 55.7 7.11 3.50 0.073 0.014 0.022 0.073 9.15
JORC AL2 O3 Joint Venture Classification Mt Fe % SiO2 % % P % S % Mn % MgO % Lol %
Red Hill iron ore joint Measured 125 57.7 5.36 3.37 0.084 0.014 0.030 0.087 8.06 venture (API Indicated 285 56.4 6.22 3.83 0.071 0.019 0.030 0.100 8.68 Management 60%, increasing to 80% upon Inferred 62 55.6 6.57 4.15 0.070 0.020 0.029 0.108 9.01 commencement of Total 472 56.6 6.03 3.75 0.074 0.018 0.030 0.098 8.56 commercial production)
JORC AL2 Joint Venture Classification Mt Fe % SiO2 % O3% P % S % Mn % MgO % Lol %
Mount Stuart iron ore Measured 2 55.1 6.61 3.64 0.041 0.020 0.058 0.208 9.99 joint venture (API Indicated 73 55.1 6.91 3.16 0.037 0.016 0.079 0.178 10.26 Management 70%) Inferred 23 54.6 7.53 3.10 0.037 0.015 0.102 0.209 10.40 Total 98 55.0 7.05 3.15 0.037 0.016 0.084 0.186 10.29
For personal use only use personal For
18 Total JORC Resources include Bedded, Channel and Detrital Iron Deposits. 19 Channel Iron Deposits chemistry are weighted averages from numerous deposits. 20 The Ken’s Bore East deposit (Stage 1), which comprises 117Mt at 57.6% Fe (Measured Resource - 82Mt; Indicated Resource - 34Mt; Inferred Resource - 1Mt), is the subject of dispute between API Management and Red Hill Iron Limited (Red Hill Iron Limited v API Management Pty Ltd WA Supreme Court Proceedings CIV 1977 of 2011).
Target’s Statement
JORC AL2 Classification Mt Fe % SiO2 % O3% P % S % Mn % MgO % Lol %
Yalleen Project (API Measured – – – – – – – – – Management 100%)21 Indicated 48 57.3 5.27 3.71 0.058 0.016 0.057 0.117 8.56 Inferred 36 57.1 5.28 3.81 0.061 0.015 0.056 0.109 8.56 Total 84 57.2 5.28 3.75 0.060 0.016 0.057 0.113 8.56
West Pilbara Iron – Detrital Iron Deposit
JORC AL2 O3 Joint Venture Classification Mt Fe % SiO2 % % P % S % Mn % MgO % Lol %
API JV - Mt Elvire (API Measured – – – – – – – – – JV 100%) Indicated – – – – – – – – – Inferred 101 54.4 11.94 3.60 0.080 0.021 0.025 0.050 5.76 Total 101 54.4 11.94 3.60 0.080 0.021 0.025 0.050 5.76
West Pilbara Iron – Hardy Project (Bedded Iron Deposit)
JORC AL2 Joint Venture Classification Mt Fe % SiO2 % O3% P % S % Mn % MgO % Lol %
API JV - Hardey (API Measured 106 61.5 3.74 2.33 0.147 0.007 0.062 0.080 5.42 JV 100%) Indicated 23 60.0 4.13 2.54 0.100 0.014 0.081 0.120 6.83 Inferred 23 58.7 5.32 2.59 0.108 0.010 0.057 0.142 7.37 Total 151 60.8 4.03 2.40 0.134 0.009 0.064 0.095 5.92
Eastern Pilbara – Innawalley Pool Project (Bedded Iron Deposit)
JORC AL2 Joint Venture Classification Mt Fe % SiO2 % O3% P % S % Mn % MgO % Lol %
API JV - Innawalley Measured – – – – – – – – – Pool (API JV 100%) Indicated – – – – – – – – – Inferred 63 58.8 3.91 4.55 0.160 0.010 0.041 0.200 6.43 Total 63 58.8 3.91 4.55 0.160 0.010 0.041 0.200 6.43
West Pilbara Iron and wider Pilbara tenements – summary of Resources22 JORC Classification Mt % Fe% Measured 315 14 Indicated 463 21 Inferred 1,455 65 Total 2,233 100 56.3%23
Thabazimbi Iron Ore Project
Resource The Project area contains an estimated JORC Code 2004 Resource of 80.8Mt (November 2012).
JORC Classification Mt Fe % SiO2 % AL2 O3 % P % Lol % Measured 37.1 62.28 7.57 0.68 0.045 1.26 Indicated 23.5 60.85 9.35 0.75 0.052 1.59 Inferred 20.2 59.20 11.15 0.83 0.059 1.76
For personal use only use personal For Total 80.8 61.09 8.99 0.73 0.051 1.48
21 There appears to be disagreement as to whether Helix Resources Limited, which initially held a 30% interest in the Yalleen Project, has had its interest diluted to a royalty. 22 Variations in totals are due to rounding. Total JORC Resources include Bedded, Channel and Detrital Iron Deposits. 23 Weighted average.
Target’s Statement
Avontuur Manganese Project Reserve The Gravenhage Manganese Deposit contains an estimated JORC Code 2004 Reserve of 20.2Mt (November 2011). JORC Classification Mt Mn% Proved 8.6 40.3 Probable 11.6 40.0 Total 20.2 24 40.1
Resource Avontuur contains estimated JORC Code 2004 and JORC Code 2012* resources totalling 141.7Mt (August 2013). JORC Classification Mt Mn % Measured 25 63.9 39.16 Indicated 26 28.4 38.23 Inferred 27 49.4 37.38 28 Total 141.7 38.35 29
* Resources reported under the JORC Code 2012 were first reported in Aquila’s September 2013 Quarterly Report, released to the ASX on 22 October 2013. Aquila confirms that it is not aware of any new information that materially affects the information included in its September 2013 Quarterly Report and that all material assumptions and technical parameters underpinning the Resources estimates in its September 2013 Quarterly Report continue to apply and have not materially changed.
Production Target Disclosure Statement The information in this Target’s Statement is a re-issue of information previously issued by Aquila on 11 June 2014 in its announcement entitled “Listing Rule 5.16 Clarification” available from ASX (Announcement). The Announcement details that the information is based on information reviewed by Mr Steve Craig, Mr Jack Steenekamp, Mr Ross Haupt and Mr Manie Kriel, who is each a ‘Competent Person’ for the purposes of JORC. Aquila confirms that: (a) it is not aware of any new information or data that materially affects the information in the Announcement and that, to the extent the information is a production target, none of the material assumptions or technical parameters underpinning such estimates have materially changed; and (b) the form and content in which information in the Announcement is presented has not been materially modified.
Competency Statements Eagle Downs The information in this Target’s Statement that relates to the Eagle Downs Coal Reserves is based on information reviewed by Mr Jack Steenekamp, who is a Fellow of the Australasian Institute of Mining and Metallurgy. Mr Steenekamp has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Steenekamp is a full time employee of Mining Consultancy Services (Australia) Pty Ltd and holds the position of Managing Director. Mr Steenekamp consents to the inclusion of the matters relating to the Eagle Downs Coal Reserves based on the information in the form in which it appears in this Target’s Statement. Reserves are quoted in compliance with the 2004 JORC Code.
For personal use only use personal For 24 Avontuur JORC Reserve based upon Resource Statement issued February 2011. 25 Gravenhage Manganese Deposit JORC Code 2012. 26 Gravenhage Manganese Deposit JORC Code 2012. 27 Gravenhage Manganese Deposit (JORC Code 2012) 19.4Mt @ 36.46Mn, Gravenhage South (JORC Code 2004) 19.8Mt @36.10% Mn, Haakdoorn (JORC Code 2004) 8.4Mt @40.77% Mn, Eersbegint (JORC Code 2004) 1.8Mt @45.5% Mn. 28 Weighted Average. 29 Weighted Average.
Target’s Statement
The information in this Target’s Statement that relates to the Eagle Downs Resource is based on information compiled by Mr Mal Blaik who is a member of the Australasian Institute of Mining and Metallurgy. Mr Blaik has over 30 years’ experience in geology and over 20 years’ experience in coal resource evaluation. Mr Blaik is a Principal Consultant of JB Mining Services Pty Ltd. Mr Blaik is a qualified geologist (BSc App Geol (Hons) University of QLD, 1979) and is a member of Australasian Institute of Mining and Metallurgy and as such qualifies as a Competent Person as defined in the 2004 JORC Code. Mr Blaik consents to the inclusion of the matters relating to the Eagle Downs Resource based on the information in the form and context in which it appears in this Target’s Statement. Resources are quoted in compliance with the JORC 2004 Code. Washpool The information in this Target’s Statement that relates to the Washpool Reserve was prepared by Mr Ross Haupt who is a director of Xenith Consulting Pty Ltd. Mr Haupt holds a Bachelor Degree in Mining Engineering from the University of Queensland with over 25 years’ experience in the open cut coal mining industry and substantial experience in mining operations. Ross Haupt is a Member of the Australasian Institute of Mining and Metallurgy. Mr Haupt has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Haupt consents to the inclusion of the matters relating to the Washpool Reserves based on the information in the form and context in which it appears in this Target’s Statement. Reserves are quoted in compliance with the 2004 JORC Code. The information in this Target’s Statement that relates to the Washpool Resource was prepared under the supervision of Mr Brent Green who is a member of the Australian Institute of Geoscientists. Mr Green is a full-time employee of Aquila. Mr Green has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as Competent Persons as defined in the 2004 JORC Code. Mr Green consents to the inclusion of the matters relating to the Washpool Resource based on the information in the form and context in which it appears in this Target’s Statement. Reserves are quoted in compliance with the 2004 JORC Code. Walton The information in this Target’s Statement that relates to the Walton Resource was prepared under the supervision of Mr Brent Green who is a member of the Australian Institute of Geoscientists. Mr Green is a full-time employee of Aquila. Mr Green has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Green consents to the inclusion of the matters relating to the Walton Resource based on the information in the form and context in which it appears in this Target’s Statement. Resources are quoted in compliance with the 2004 JORC Code. Talwood The information in this Target’s Statement that relates to the Talwood Resource was prepared under the supervision of Mr Brent Green who is a member of the Australian Institute of Geoscientists. Mr Green is a full-time employee of Aquila Resources Limited. Mr Green has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Green consents to the inclusion of the matters relating to the Talwood Resource based on the information in the form and context in which it appears in this Target’s Statement. Resources are quoted in compliance with the 2004 JORC Code. West Pilbara Iron The information in this Target’s Statement that relates to the West Pilbara Iron Reserve is based on
information compiled by Mr Steve Craig, Managing Director of ORElogy (Mining Consultants). Mr Craig is a For personal use only use personal For Member of the Australasian Institute of Mining and Metallurgy and has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration, and to the activity he is undertaking, to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Craig consents to the inclusion of the matters relating to the West Pilbara Iron Reserve based on the information in the form and context in which it appears in this Target’s Statement. Reserves are quoted in compliance with the JORC 2004 Code.
Target’s Statement
The information in this Target’s Statement that relates to the West Pilbara Iron Resource and wider Pilbara tenement areas was prepared under the supervision of Mr Stuart Tuckey. Mr Tuckey is a member of the Australasian Institute of Mining and Metallurgy and full-time employee of API Management Pty Ltd. Mr Tuckey has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Persons as defined in the 2004 JORC Code. Mr Tuckey consents to the inclusion in the Target’s Statement of the matters relating to the West Pilbara Iron Resource based on his information in the form and context in which it appears in this Target’s Statement. Resources are quoted in compliance with the JORC 2004 Code. Thabazimbi The information in this Target’s Statement that relates to the Thabazimbi Resource was prepared under the supervision of Mr Brent Green. Mr Green is a member of the Australian Institute of Geoscientists. Mr Green is a full-time employee of Aquila. Mr Green has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Green consents to the inclusion of the matters relating to the Thabazimbi Resource based on the information in the form and context in which it appears in this Target’s Statement. Resources are quoted in compliance with the 2004 JORC Code. Avontuur The information in this Target’s Statement that relates to the Gravenhage Reserves was prepared under the supervision of Mr Manie Kriel who is a Fellow of the South African Institute of Mining and Metallurgy. Mr Kriel has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as a Competent Person as defined in the 2004 JORC Code. Mr Kriel consents to the inclusion of the matters relating to the Gravenhage Reserves based on the information in the form and context in which it appears in this Target’s Statement. Reserves are quoted in compliance with the 2004 JORC Code. The information in this Target’s Statement that relates to the Gravenhage, Gravenhage South, Haakdoorn and Eersbegint Resources was prepared under the supervision of Mr Brent Green who is a member of the Australian Institute of Geoscientists. Mr Green is a full-time employee of Aquila. Mr Green has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the JORC 2004 Code and 2012 JORC Code. Mr Green consents to the inclusion of the matters relating to the Gravenhage, Gravenhage South, Haakdoorn and Eersbegint Resources based on the information in the form and context in which it appears in this Target’s Statement. Resources for the Gravenhage Deposit are quoted in compliance with the 2012 JORC Code and Resources for Gravenhage South, Haakdorn and Eersbegint are quoted in compliance with the 2004 JORC Code.
For personal use only use personal For
Target’s Statement
This page has been left blank intentionally For personal use only use personal For For personal use only Aquila Resources
For personal use only use personal For Aquila Resources Limited Level 2 Aquila Centre, 1 Preston Street Como WA 6152, Australia T: (61) 8 9423 0111 F: (61) 8 9423 0133 E: [email protected] ABN 81 092 002 769