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New Hope keeps the faith in coal with Bengalla buy
THE AUSTRALIAN12:00AM JUNE 20, 2016
Matt Chambers
Resources reporter
Melbourne
Shane Stephan, managing director of New Hope Coal.
The coal industry tends to sing from the same song sheet when it talks of the fuel’s place in the world’s energy mix, and it is one of continued strong demand.
But there remain next to no companies putting their money where their mouths are and buying decent assets during the biggest downturn in a decade.
The exception is New Hope Group, which spent $865 million on Rio Tinto’s stake in the Bengalla thermal coal mine in the Hunter Valley in the biggest global coal mine acquisition of the past year and the biggest Australian mining deal in that time.
And the reason for the acquisition is as simple as that — it is a bottom-of-cycle move.
“We believe there is a good long-term future for high-quality thermal coal into Asia,” New Hope’s straight-talking chief Shane Stephan tells The Australian from the company’s headquarters near Ipswich in Queensland.
It sees no obvious major synergies and plans no improvements at the mine, which was operated by Rio Tinto’s Coal & Allied since 1999.
“The core attractions were really the long-dated approvals, out to 2039, and that it is approved to produce up to 15 million tonnes per annum of ROM (run-of-mine) coal from 10.7 million now,” Stephan says.
“It’s good-quality thermal coal, with a very low cost base.”
New Hope, which is 60 per cent owned by the wealthy Millner family’s Washington H Soul Pattinson and 11 per cent owned by Mitsubishi, is a miner that should be listened to when it comes to buying and selling around cycles.
In 2008, the company sold the New Saraji coking coal deposit to BHP Billiton-Mitsubishi Alliance for $2.45 billion.
The lease that project, which remains undeveloped, was picked up for nothing after BHP rationalised its portfolio in the late 1990s when resources were well out of favour.
In 2011, New Hope received $576m for its stake in Arrow Energy, which was bought by a Shell/PetroChina joint venture and whose coal-seam gas reserves are still largely undeveloped.
New Hope had spent $110m on the stake, having bought it from Macquarie in 2006 for $49m and topped up with subsequent equity raisings.
Stephan says a major part of the New Hope success, and resulting strong balance sheet, has been having patient major shareholders, rather than reporting to a group of fund managers with a shorter-term focus. This has allowed the company to make longer-term decisions.
“That’s a competitive advantage for us that has been demonstrated by the historic behaviour of New Hope in acquiring assets in the downturns and being wise enough to sell some assets at the top of the market,” he says.
“The issue any resource company has is being able to move when others can’t, which comes down to balance sheet, and I think we’re one of the few coal companies globally sitting on a balance sheet without any debt.”
New Hope’s confidence in coal demand growth is not global.
Stephan does not see Europe and the US as growth markets, but in Asia, he says the delivered cost of gas per energy output is two to three times that of coal.
In Japan, cleaner coal technology are being used, such as J-Power’s Isogo plant which uses higher temperatures and pressures to reduce emissions.
“Australian coals are typically high energy, low ash coals, so they are very well suited to situations where customers want to reduce carbon dioxide emissions while still producing the power,” he says.
Stephan joined New Hope from Macarthur Coal in 2009 and took over from Rob Neale as chief executive in 2014.
He has had a long and varied career in the sector, starting as a cadet at Ipswich when he was 17 and rising to management at the German Creek mine in central Queensland over the next decade. After that he studied business for five years and became an investment banker at Barclays under Simon Mordant in the 1990s.
He then spent nearly five years as district inspector of mines in Mackay before joining Macarthur in 2001, working closely with chief executive Nicole Hollows in a broad range of roles.
“It (the diverse coal career) has been a real advantage in my current role, because people tend to underestimate the challenges other people or sectors of the resources industry have,” Stephan says.
At Bengalla, which is now run by a joint venture company owned 40 per cent each by New Hope and Wesfarmers and 10 per cent each by Mitsui and Taipower, the priority is to see if costs can be reduced further, rather than expansions.
At New Hope’s New Acland mine, where the licence runs out in 2018, a potential life extension to 2029 and 50 per cent expansion to 7.5 million tonnes per year is facing opposition in a Brisbane court.
“We would hope the Land Court makes it recommendations (to the Queensland government) in August and that we can obtain the mining lease so we can provide security to our employees,” Stephan says.
“We’re getting crunched for time. We need the mining lease this calendar year to ensure continuity of operations and employment not only at the mine but for people that service the mine.”
He says there are 275 direct jobs at risk and a total of 475 jobs in danger if the mine closes.
“There will be enormous negative social consequences as well as economic. The mine has been a part of the town (Acland) since 2002,” Stephan says.
NHC Price at posting:
$1.46 Sentiment: Hold Disclosure: Held
(20min delay)
