Acacia Coal recently announced the conditional AUS$3.7 million acquisition of Rio Tinto’s majority stake in the Riversdale Anthracite Colliery (RAC), representing a fundamental shift in the company’s strategy. Having been established on the back of a coking coal asset in the Bowen Basin in Queensland, Comet Ridge, it became apparent that the Company needed to expand its horizons in order to better deliver value to its shareholders.
The Comet Ridge project was valued, at one stage, at $120 million in terms of the Company’s market capitalisation, however the problem was that when the market for semi-soft coking coal turned so too did the fortunes of Acacia.
Acacia re-evaluated its operations and appointed Adam Santa Maria as executive chairman to lead the new focus for the company. He and the company spent almost a year searching the world for a suitable project inside and outside the resources sector and in October they announced the Riversdale acquisition.
“It attracted us because it stands out even in a depressed commodity price environment. It’s a strategically defensive asset because it has the potential to generate solid cashflows in down markets and has leverage to the upside too,” explains Santa Maria.
As Santa Maria says, Acacia was looking for a project that suited the company’s stringent acquisition criteria. The management has a policy of targeting low risk/high value projects which are: Relatively advanced and short lead time to production, low capital intensity, high value and high margin product, strategically important commodity with long term demand, in a jurisdiction with a long mining history and have a long mine life.
While this criteria may have left the company searching for the perfect project that is unlikely to exist in such trying times for the mining industry, Santa Maria identified RAC as a suitable asset to add to Acacia’s existing business.
“[RAC] ticked all of those boxes and it just happened there was a very experienced and knowledgeable management team that was set up in South Africa to take the project forward.”
In a period of depressed prices where making the most out of the assets you have, an experienced management team that will deliver on its aims is fundamental for success. Investors often choose the strength of the management over the strength of a project – in this case Acacia has both.
RAC was the foundation asset of Riversdale Mining, catapulting the company to the size it is today, Riversdale was acquired by Rio Tinto for AUS$3.9 billion in 2011. Santa Maria is hoping Acacia can use RAC as a stepping stone to create something bigger and change the company’s circumstances significantly.
RAC is an advanced anthracite coal project located near Vryheid in KwaZulu-Natal. There are two prospective seams in the Gus and Alfred seams which indicate potential for multi-year mine life. In addition to the strategic benefits of the project, RAC is strengthened by access to existing infrastructure. There is an unused functioning railway just 7km from the tenement which will provide access to Richards Bay Coal Terminal lines and the civil and rail works will be undertaken by the rail operator. There is onsite power readily available and a regional skilled workforce which will be based in Vryheid with no need to build a camp.
Acacia’s deal with Rio is conditional on a period of six months’ due diligence on the project. In that time Santa Maria is focusing on updating the resource and reserve and refreshing the 2010 bankable feasibility study. With that work completed the project will be in a position to trigger the final payment to Rio Tinto and Acacia can pursue the development of a mine plan and marketing strategy.
Santa Maria has identified a work schedule to be completed in order to progress RAC toward commercial production targeted for 18-24 months. The JORC 2004 resource, completed by Riversdale Mining, needs to be converted to meet JORC 2012 guidelines, this work includes updating the bankable feasibility study to include the Alfred Seam and ensuring the Alfred Seam inventory meets JORC compliant requirements. Following that, Acacia will seek to amend the cut off grade criteria to allow substantially greater quantities of coal to brought into a future mine plan.
“We want to move pretty quickly into production as soon as we can. In 12 months, we would hope to be looking at detailed designs, contracts and securing the funding for the development of the plant on site which will take about six months to finalise,” says Santa Maria.
“If everything goes according to plan we want to be online in 18-24 months from completion.”
Prior to the Rio transaction Acacia had approximately $1 million in the bank and Santa Maria wanted to raise the minimum amount necessary to complete the preliminary work. Acacia raised $2.7 million on a 1-for-2 basis to offer shareholders a healthy discount.
“That will keep us well-funded to undertake all of the due diligence and preliminary activities. Once we progress the mine development we will need to look for additional incremental funding.”
Anthracite has specific market tendencies in South Africa. Santa Maria says there is a lack of quality coking coal project in the country coupled with insufficient coal import infrastructure. Therefore anthracite has become the dominant reductant in ferrous-chrome and ferrous-manganese industries in South Africa resulting in an inelastic floor price.
Acacia is predicting a forthcoming supply-side deficit in South Africa which will be good news for the project in terms of a pending price rise. Santa Maria adds that the industry has been facing dilutionary problems and Acacia could profit in terms of the market accepting a higher ash product leading to a potential additional revenue stream for RAC.
In terms of a timeline for RAC, Santa Maria expects that in 12 months’ time a number of the key activities will be completed in order to begin construction. He expects to have formally completed the RAC acquisition, to have a detailed mine plan in place and be positioning to begin construction on the plant at the base of the mountain at the Riversdale project.
“We will hopefully also have entered into a couple of strategic offtake agreements and we have already had interest from significant global and local offtakers. We are confident that all the product we will produce from that asset will be in high demand.”
Following that period Santa Maria has a further six months’ construction schedule in mind and so in two years he hopes the project is generating a healthy cash flow with what he calls a ‘nice margin’. RAC could provide the stepping stone to boost Acacia’s position in the global mining industry.
“RAC will be used as a cash base for Acacia. We will look to build something bigger and relevant on a global scale, that will possibly come through more acquisitions.”