Bulk Buys: Dartbrook’s return shows thermal coal isn’t going away just yet
Tasked with bringing the newest Australian coal miner to market after what has been a turbulent year for the ~$60 million capped minnow Australian Pacific Coal (ASX:AQC), energy market veteran Ayten Saridas has seen plenty of turbulence.
Prices plumbed multi-year lows, threatening to send heavily indebted coal miners to the cleaners.
On her return as interim CEO at mine-builder AQC the world is a very different place.
Newcastle thermal coal prices surged to more than US$450/t at one point late last year as Russia’s invasion of Ukraine brought European buyers running desperately into the market for Australian coal at the same time as weather and labour shortages crimped supplies, sending industry profits to all time highs.
Saridas’ former employer Coronado, which sells met coal from ops in Australia and the US along with a sprinkle of thermal, reported record revenue of US$3.6 billion last year and paid out a record US$700m to shareholders.
Long burdened by a massive debt to long-time backer Trepang Services, a company associated with pearling mogul Nick Paspaley, AQC was revived amid a corporate sword fight last year when once bankrupt, once billionaire Nathan Tinkler returned to the scene after six years in the corporate wilderness.
He didn’t manage to secure control of the company and its Dartbrook mine. That went to a consortium including AQC, which brought on a number of new investors in a $100 million rights issue, Trepang, Matt Latimore’s M Resources and the mine’s planned operator Tetra Resources.
A restructure announced on Monday will see AQC reclaim an 80% stake in the mine and 70% economic interest, prepping it for a return to production in Q4 this year after a $100-120 million redevelopment, reopening for the first time since Anglo American shut up shop in 2006.
Thermal coal prices have fallen since momentum began to build around the mine’s planned reopening — falling more than 50% with front month futures fetching US$187.60/t yesterday.
But Saridas says there is good reason to think the market will support the mine for years to come.
“The cost of production for this mine is one of the lowest in the area. So we’re not at all concerned about where current pricing is,” Saridas told Stockhead.
“So if you’re looking around US$200 per tonne, our cost (leaves) around about US$100 of margin in there for us. There’s plenty of scope there for us to continue mining.
“So we’re not at all concerned, lenders are not concerned. But longer term, if you look at the forward curve as well, we think there is still going to be demand for thermal coal.
“I think the disruption coming from Russia has certainly highlighted that whilst we’re all transitioning to a net zero future, the reality is when winter hits we need to keep our people warm.”
With the big four banks effectively closed off to fossil fuel lending, AQC is currently talking to private investors in America, Australia and Asia about providing the finance to get Dartbrook, located 4km west of Aberdeen in the Hunter Valley adjacent to New Hope Corporation’s (ASX:NHC) Bengalla operation, off the ground.
“These are private investors, trading houses, high net worth individuals who still recognise there is an economic reality here and someone has to finance it,” Saridas says.
“There are good returns to be made out of lending into the coal space, but they are strategic investors.
“The US is still very, very strong. Surprisingly there’s still a lot of appetite here in Australia as well and then you’ve got Asia as well, Asia is still very pro thermal coal funding.
“Again, you’re not going to see it from the major banks out of Japan, you’re going to see it from private investment.”
Dartbrook’s wash plant — a facility installed by Anglo that Saridas estimates would cost a greenfields operation $300m to replicate, can accommodate 6Mtpa of output.
Dartbrook itself has 370Mt of marketable reserves and 1.2Bt of resources, all accessible via underground bord and pillar mining.
The plan is to start small, ramping up to around 1Mtpa by the end of 2024 and then continuing to grow beyond that to 3Mtpa by around 2026-2027.
There is a potential overhang on the stock there. Dartbrook can’t be mined by open pit methods after the New South Wales Government ruled that out last year — as anticipated by the company — under pressure from local thoroughbred breeders.
Its underground approvals will run until 2027, with Saridas aiming to get that extended to 2033.
From there, she believes the market will support the operation longer term if the policy environment remains supportive of brownfields coal developments amid increasing pressure on regulators.
“If we get the permit to extend our mine lease to ’33 and then if we can renegotiate after that, to extend that, this mine can continue,” she said.
“There’s about 370Mt of marketable reserves. But we’ve got a 1.2 billion tonne resource, so we can continue mining a good 20 years, 50 years.
“It’s going to be subject to the regulatory environment. But having said that, I think what we’ve seen politically over the last 12 months, there is still a need for a balance.”
Dartbrook isn’t the only operation looking to come online. Whitehaven Coal (ASX:WHC) recently approved the early development of a small scale version of its Vickery Extension Project, previously operated by Rio Tinto in the 1990s.
There is less appetite from governments to approve new greenfields coal mines, which are likely to face increasing local and activist opposition. That could have the unintended consequence of further supporting prices for existing Australian thermal operations.
“Politically, I don’t think governments would approve greenfield projects. But we have had the benefit that this is not in your Greenfield category,” Saridas said.
“This is an asset that was producing, for commercial reasons they shut it in, and we are recommissioning it because it is the right time to do that.”
At a market cap of under $60m, Saridas acknowledges Dartbrook’s development ready state and the dearth of projects available for companies to grow production means AQC could become a takeover target.
But she says the company would only accept “fair value” given the replacement cost of the Dartbrook wash plant, resource base and “free option” on the share price of a potential extension of its mining approval to 2033.
At current prices AQC would be aiming to pay back debtholders over an 18-24 month time frame, Saridas said. But it is looking to avoid sweeps so JV partners and investors can see returns early in the piece.
“I think the shareholders in this asset had been very, very patient for a long time and any debt holder has to be cognisant that we need some distributions back,” she said.
“So that’s my job to negotiate that right now.”
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The overall mood on China from the majors has been optimistic to say the least.
Just check out the comments from FMG’s (ASX:FMG) Fiona Hick last week.
Fortescue had more to celebrate this week as Hick and chairman and major shareholder Andrew Forrest announced first production from their Iron Bridge magnetite mine which, as first time of asking, delivered an above spec 68% Fe plus concentrate.
The project will eventually produce 22Mtpa, selling a product that is suited to low emissions steelmaking and draw a premium over the prevailing 62% Fe iron ore price.
At the same time, FMG and other iron ore miners could see muted demand for products like these in the near term with mills suffering pressure from negative margins.
Last week saw the second straight pullback in blast furnace utilisation in the Middle Kingdom, home to almost 60% of steel production globally and around four-fifths of Australian iron ore demand.
It came after a strong start to the year for steel production.
Iron ore prices have reverted from levels in excess of US$130/t earlier this year to a touch over US$100/t as steel PMIs in China fell to a paltry 45 (any number under 50 indicates a contraction) in April.
We’ll see more clarity on the direction in iron ore prices when China emerges from its Labour Day holiday tomorrow.
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