September 14, 2010Young King Coal: Nathan Tinkler Aims To Use...

September 14, 2010

Young King Coal: Nathan Tinkler Aims To Use Aston Resources To Make Another Big Splash In The Australian Coal Market.

By Alex Williams / www.minesite.com

Nathan Tinkler is perhaps one of the most distinctive men in the Australian mining industry. The avid collector of race horses and the youngest man on Australia's rich list has risen from being a coalface electrician to a coal mine owning magnate. And all before the age of thirty-five. However, his latest venture, Aston Resources, has been greeted by the market with wary trepidation.

Tinkler began his career at eighteen, working as an apprentice to an electrician in the Hunter Valley coal mines, before going on to found his own mine machinery business. Then, borrowing A$1 million against this company's assets, which had grown rapidly to a staff of twenty-five, he bought into the then undeveloped Middlemount project in central Queensland.

When Macarthur Coal weighed in at Middlemount in January 2008, Tinkler was left holding a 10 per cent stake in the world's largest producer of low volatile PCI coal. But his ambitions weren't sated. Later that year, as steel mills scrambled to gain access to high quality coal assets, he sold his stake to ArcelorMittal for A$440 million, or A$19.9 per share. And nine months later the value of those same shares had fallen by more than 87 per cent to less than A$2.50, suggesting that Tinkler has a keen sense of timing, which is invaluable in an industry more cyclical than most.

Now the man dubbed "the whale" (because of the large splash he's made) has found a fresh outlet for his wealth, buying the Maules Creek coal deposit in February from Coal & Allied Industries for A$480 million. The deposit contains a resource in excess of 600 million tonnes, with marketable reserves of 321 million tonnes. Located in the coal-rich state of New South Wales, it sits 16 kilometres from railway access to the Port of Newcastle. Coal & Allied, majority owned and managed by Rio Tinto, sold the deposit to raise funds for "growth opportunities and capital requirements", likely to include development of its Mount Hope project.

As a result, Tinkler has once again come into possession of a deposit of a kind rarely held outside of the world's largest diversified miners. Aston Resources, which wholly owns the deposit, was part-floated to institutional investors in August at an issue price of A$5.96. This was sharply lower than the A$8.20 the company was initially expecting, after the IPO was cautiously received.

Sceptical fund managers argued that without existing rail or port access, Aston ought to be priced as a "concept stock." To compound matters, the capital raising leaves management some A$300 million short of projected development costs. So Tinkler will therefore need to raise further investment elsewhere, potentially leading to early-stage equity dilution. Alternatively, Aston could sell a direct stake in Maules to an Asian trading house, like Itochu Group or Noble, who in total subscribed A$92m to the company's launch.

This would be in line with industry practice: Rio Tinto only owns 82 per cent of its Hail Creek coal mine in Queensland, whilst Macarthur Coal owns no more than 73 per cent of any of the mines that it operates. Whichever avenue Tinkler decides on, investors may well be nervous that the man a track record of impeccable timing is trying to gather funds whilst he considers the market is hot. Recent bids for Centennial Coal and for the assets of Linc Energy have follow on the heels of a complex, failed tussle for Macarthur Coal. All could potentially signify an abrupt market peak, the thinking goes. However, concerns that Australia's youngest coal baron is trying to offload his risk exposure onto investors are somewhat offset by Tinkler's retention of at least 35 per cent of Aston through a private investment vehicle.

In many ways, Maules Creek is a superior coal deposit to anything being constructed or operated either by Coal & Allied or its parent, Rio Tinto. The latter's Clermont mine, which is expected to reach full capacity in 2013 has a marketable reserve of 190 million tones, 40 per cent below that of Aston's. Coal & Allied holds larger assets - the reserve at its Mount Hope project amounts to a whopping reserve of 459 million tonnes. But much like the Coal & Allied operations in the Hunter Valley, the bulk of this is thermal rather than metallurgical coal. Maules Creek by comparison is thought to contain 47 per cent coking coal and a further 10 per cent PCI. At full capacity, an open-cut operation could produce 10.8 million tonnes per year for up to thirty years.

Macarthur Coal's Keith DeLacy and Nicole Hollows deposits, meanwhile, weigh in at roughly 183 million tonnes of recoverable coal, spread over several different mines. Despite being smaller than Maules, the Macarthur assets command a market capitalization 2.3 times larger than that of Aston Resources. This valuation gap is of course entirely logical: the difference between Aston and its well-established peers is that whilst they hold producing assets, Maules Creek is nothing more than a well-drilled patch of coal-rich ground.

And rail and port access could yet prove the main constraint to making a success of Maules. But Nathan Tinkler has already made one big splash in the sector. Aston could be his second.