New Hope Group (ASX:NHG) has had a long history in the Queensland coal mining industry. It started as an underground coal mining company in 1952 in West Moreton, the home of Queensland mining. Washington H. Soul Pattinson (WHSP) became the major stakeholder in the late 1970s investing in a 60% interest. The company was listed on the ASX in 2003 for an initial public offering of AUS$286 million.
Shane Stephan, New Hope’s managing director, explains that having a long-term successful investment house such as WHSP as its major shareholder has encouraged an operations strategy that has brought high level success since the investment.
“The company strategy has been one of holding on to a few core assets to operate and using disciplined capital investment to make money buy and selling assets through the cycles.
“Having a share ownership structure like we do provides us a patient capital and therefore the ability to see through coal prices better than our rivals.”
The coal sector is on a roundabout of peaks and troughs in terms of price and New Hope’s vastly experienced management team have been in the industry long enough to have seen several price cycles.
New Hope Group has demonstrated an exemplary track record of M&A activity in the last 10 years. It has continually been able to invest capital in projects, push them up the value curve and then offload them with significant upside on the initial investment.
“WHSP holds 60% of our shares, we are controlled by them and they are patient investors and that is definitely a competitive advantage of the firm,” says Stephan.
Having pioneered Australian investment in the Indonesian coal industry through its acquisition of the Adarro project, it sold its interest for US$406 million in 2005. New Hope picked up the New Saraji project, located near BHP Billiton’s Saraji open-cut mine in central Queensland, for next to nothing and sold its interest, in an exhibition in expert board-level timing, for AUS$2.45 billion in 2008. In 2006, New Hope acquired an interest in Arrow Energy for $48 million and in 2010 received $650 million for the same stake. Using the cash in the bank New Hope reinvested by purchasing Rio Tinto’s 40% stake in the Bengalla thermal coal mine for $865 million.
The timing of this year’s investment in Bengalla is significant. It reflects the board-led strategy of investing in a low-cost asset at the bottom of the cycle at the right price. Following the sale of both the Arrow and Saraji interests, paying tax and paying a large special dividend to shareholders New Hope still had over $1 billion cash in the bank – other more daring firms might have jumped at any opportunity with that level of capital available.
“We have been very patient in holding onto that capital during the downtown. In 2015 we came to a point where we believed the coal price reached unsustainable levels,” New Hope formed that view on market struggles occurring in China, as well as the domestic situation.
Last year over 90% of Chinese thermal coal operations were not making money, according to Stephan. In New Hope’s opinion that situation was unsustainable and that was cemented in mid-2015 when some Chinese companies were to pay the wages or their staff or defaulted on interest payments on their loans.
Both Australia and Indonesia showed similar negative situations with very few thermal coal projects able to turn a profit in 2015.
“We formed the view that this was the appropriate time to start looking for an asset. We had been looking continuously for coal assets for sale and what attracted us to Rio Tinto’s Bengalla stake was its position on the cost curve,” notes Stephan.
Bengalla matches the profile of how New Hope targets investments. It is a low strip-ratio mine, it has an existing infrastructure chain, it is producing at around 10.5 million tonnes per annum (mtpa) with room for significant upside and it is in New South Wales which Stephan says helps to mitigate regulation risk by being located in a different state.
Once Bengalla had been identified New Hope immediately undertook due diligence in mid-2015. The transaction was announced in September last year before being formally completed on 1 March 2016.
“In hindsight the timing of that transaction looks good given the increases in coal prices in seaborne coal prices in Asia since July this year,” currently the spot price for thermal coal sits at US$110 per tonne, when New Hope completed the transaction it was less than half that around US$50-52. “It is all about timing, M&A is always about timing.”
These major investment decisions do not happen by chance. It takes an experienced management team to make those judgements on global commodity markets. In addition, the board must have the confidence in the management to back them with significant capital in a period when the coal industry had been through five years of decline.
“That’s a characteristic of our company, our board is particularly disciplined in making capital investment decisions. We are fortunate that we have a lot of very experienced managers that have seen many coal price cycles,” Stephan is a leading example with over 35 years’ experience in the resources sector.
New Hope Group is headquartered in Ipswich, Queensland and all its current core operating assets are located in the state.
The flagship project is the 100% owned New Acland mine. Situated just outside the town of Oakey, New Acland is a 5mtpa thermal coal mine, it has a low strip-ratio and is a multiple thin seam mining operation.
The yield – product coal from the raw coal mined – sits at 52% and Stephan says New Hope is acknowledged in the industry as highly proficient when it comes to thin seam mining.
The product from New Acland is transported by rail to New Hope Group’s 100% owned Queensland Bulk Handling (QBH) facility at the Port of Brisbane where it is shipped to market.
New Hope’s major operating asset has also acted as a key employer in the local area and injected much-need funds into the local economy. The mine provides 300 direct jobs for local people, 160 contractors and contributes to 2,300 indirect jobs. The operations in Acland inject A$110 million into the Darling Downs economy annually and over $300 million in the broader South East Queensland purse each year.
New Hope’s commitment to hiring local people and using local businesses has ensured New Acland is a significant part of the local economy and community. Stephan says the mine’s location, with on-site workers able to live in Oakey, also delivers a competitive advantage.
“We have been able to attract and retain very high standard, experienced people because it is a far better place to live and go home each night to your family rather than fly in/fly out.”
New Hope operate a second, supplementary mine at Jeeboprilly in Amberley. It is a thermal coal mine with the capacity to produce 600,000tpa of product. However, Jeeboprilly only has around two years of coal reserves left to exploit and then Stephan says it will have to be closed and rehabilitated.
New Hope’s owned and operated exploration team have a full schedule to develop the next mining stage at New Acland and move forward with several other targets.
New Acland is currently coming towards the end of its Stage 2 mining area operations. The exploration team has been working tirelessly on infill drilling around Stage 3 areas to strengthen New Hope’s confidence in the geological models and provide a platform to submit a successful application to the Queensland Government to move to the Stage 3, which is currently progressing through the approvals process.
“Over the next six months it is very important for us to obtain the mining lease for Acland Stage 3,” particularly to ensure there is a smooth transition to Stage 3 with Stage 2 reserves due to expire in mid-2018. Stephan is expecting Stage 3 production to commence in mid-2018 and maintain production levels.
New Hope is pursuing two prospective projects at Colton and Lenton. Colton is a small coking coal project near Maryborough at which New Hope currently have a mining lease application pending, New Hope’s MD is targeting approval on that in the next 12 months. Lenton is a combination thermal-metallurgical project with an existing mining lease and New Hope is currently evaluating its development options for the project. In 2011 New Hope sold 10% of the project to a subsidiary of the Taiwanese group Formosa Plastics.
A major interest for New Hope in terms of exploration in the next six years is the tenements it holds in the North Surat region. Stephan explains that the company has a series of land holdings which total 1 billion tonnes of open-cut thermal coal. It is a huge potential resource.
However, currently there are two key barriers to entry for any company aiming to develop projects in the North Surat. Firstly, there isn’t the existing infrastructure to transport product from the region and secondly New Hope is of the opinion that the market is not presently demanding such an influx of product.
“The missing link [in the North Surat] is a rail link of around 210km to link rail from Wandoan in order to get the coal out of the North Surat through the Gladstone port,” Stephan explains.
“We believe that the market will demand that coal around 2022. In about six years from now we believe that Asian thermal coal markets will be demanding that coal. We have done a concept level study and will be working through pre-feasibility studies looking at how to develop these projects, probably in a joint venture with others.
“Our focus is on nearer-term development projects and bringing them up the value curve, in particular getting the approvals.”
The mining downturn
The mining industry has faced severely depressed prices across the board in the last few years and the coal price has been in decline since 2011. To maintain a strong balance sheet throughout the downturn New Hope focused on a cost mitigation programme for both on and off-site costs.
The company began with reducing the number of staff in the company and in addition decreased the number of operational hours worked at the mines. This helped in both reducing costs and improving efficiencies.
Stephan explains the major focus throughout the downturn has been on limiting off-site costs. That includes operational expenditure on water, power and rail transport and amounts to 50% of New Hope’s total costs.
The cost of transporting the product by rail has big implications for New Hope’s operational expenditure. It faces two charges, ‘above rail’ costs which it pays to the rail service provider Horizon and ‘below rail’ costs which is a regulator charge to Queensland Rail. The Queensland Competition Authority recently refused to approve the Queensland Rail’s proposal to hike up below rail charges and Stephan deemed it a major success for the company.
As New Hope manoeuvred the coal price downturn it made a shrewd investment in Bridgeport Energy in 2012. It was a move to diversify the company into the oil sector and reduce exposure to suppressed coal market.
Stephan says he was attracted to Bridgeport because the management team in place and the way the company was run, focused on low overheads and a low breakeven point, reflected the values at New Hope.
Bridgeport is currently producing from its assets in the Cooper, Surat and Otway basins at a rate of approximately 215,000 barrels per year. The company has overseen significant expansion since the takeover and Stephan says that trend will continue.
“We will continue to grow the organisation’s production base organically and through small bolt-on acquisitions. We would like to get production in excess of 500,000bbls p/a.
“Ultimately it is our hope that Bridgeport will get to a size where it can be the master of its own destiny and potentially we would look at an IPO.”
Open to innovation
While New Hope is controlled by a patient, long-term focused board, the management are not afraid to implement new techniques at the mine to carve out a competitive advantage in the market.
Stephan has implemented a series of innovation solution trials at the Acland mine and it became the first coal mine in Australia to successfully use a machine surface miner after the solution was suggested by a member of the project team.
The second major innovation is the current trialling of a natural gas-powered pull truck at the mine. While natural gas power is in use around the word in civil activities such as local transport, Stephan doubts any other mining operations have trialled natural gas as a fuel in a surface haul truck.
“Most of our ideas are generated by the workforce at the mine sites and come up through the ranks, they are not imposed from the top down.
“We have a of the workforce in trialling the innovations and being fairly brutal with the evaluation of those innovations. Not all of them work but enough that you are able to keep ahead of your competitors.”
Stephan has ambitious plans for New Hope Group in the next 10 years. He is aiming to have upgraded all the aspects of the current portfolio as well as making new additions through exploration. The primary task will be to push New Acland onto Stage 3 mining – a move that will increase its production to 7.5mtpa. In that time Stephan also expects Colton and Lenton to both be in commercial operations and Bridgeport will likely be separated from New Hope.
In terms of exploration objectives, New Hope is the second-largest landowner in the Ipswich region and will look to develop and monetarise some its estate, it will also progress the huge resource potential in the North Surat.
In addition, New Hope is discussing incremental expansions for Bengalla. Current production is around 10.5mtpa but the mine has the approvals to operate at a total capacity of 15mtpa. As a 40% stakeholder New Hope does not control the asset but does wield influence the management of the joint venture.
Stephan is very confident about how the way the company has been managed over the past few years will set it up to dominate the Queensland resources sector for the next 10.
“We have the balance sheet because we have cash at bank and no debt, we have the financial capacity in place to expand, we have the people in place with the competency to build new mines and we have the site workforces to be able to operate them as well,” explains Stephan.
“New Hope is in a great position to take advantage of this current price spike. But we are really looking for an increase in demand out of other Asia [outside China]. This current price spike is being driven by supply constraints in the domestic Chinese market.
“We would like to see increased demand out of the other Asia; Japan, the Philippines, Taiwan and South Korea. There is a lot of new-generation thermal coal power stations being built in those countries and that is what we are looking to as the trigger to increase our investment.”