While the phrase “resources lawyer” is one in common use, it may be prudent to give it short shrift. When one looks at the remarkable diversity of legal work coming out of the mining industry – strategic M&A advice, capital raisings to fund billion-dollar projects, joint ventures, project finance, to name but a few – it is clear that this is an area spanning many fields of legal expertise and traditional practice groups.
From Gladstone in Queensland to Barrow Island in Western Australia and many points off-shore, mining
and resources is an industry which has spawned work for lawyers of all practice areas and persuasions.
While there are a number of high profile resources related projects and transactions which vie for the
spotlight, the series of projects which has particularly captured the entrepreneurial spirit of the resources boom is the pursuit of coal-seam-gas in eastern Queensland. In this part of the Sunshine State, a number of multibillion dollar csg projects have been mooted for the Surat/ Bowen basin/
Gladstone areas. Some of these projects, such as the A$16bn Santos-PETRONAS-Total- Kogas project and the US$15bn BG venture, have already reached the final investment decision stage. At the time of writing, several other very large projects were still under consideration, most notably the Origin Energy/ ConocoPhillips partnership and the Shell/PetroChina consortium.
Commentators estimate that about A$60bn worth of investment has been either committed or is under consideration for this region alone. This activity has already led to some significant transactions for lawyers as the players manoeuvre positions. Some of the highlights last year included PetroChina and Shell’s A$3bn acquisition of Arrow Energy, a deal which saw involvement from Blake Dawson (PetroChina), Allens Arthur Robinson (Shell) and Gilbert+Tobin (Arrow Energy). Allens also advised on Total’s A$770m investment in the Santos project, sitting across the table from regular Santos advisor Freehills.
Earlier deals of note include the 2008 acquisition by British Gas (Mallesons) of Queensland Gas (McCullough Robertson) and the formation of the original Santos-PETRONAS partnership (Freehills, Vinson & Elkins), both of which were nominated for the ‘Energy & Resources Deal of the Year’ at the 2009 ALB Awards. All this demonstrates the healthy stream of legal work which has been generated by the Gladstone LNG projects.
According to Holding Redlich commercial partner David Walker, much of the impetus behind these deals remains relevant in 2011. “Shell buying Arrow, Total investing in Santos, BG buying QGC – all of those deals were about consolidating footholds on proven CSM reserves,” says Walker. “LNG plants require enormous quantities of gas to be viable commercially. They had to have sufficient supplies to convince bankers to lend them the money.”
Herbert Geer’s Jayne Steele is another lawyer who has observed smaller players continuing their explorations with renewed enthusiasm. She says that the recent positive investment decisions made by the majors appeared to have provided a boost in confidence.
Smaller miners may be the obvious targets, but ultimately the big players themselves will need to look at consolidating their own projects. Walker says that the acquisition activity will continue. “[The big players] will continue to buy smaller players,” he predicts. “There will be more M&A activity at that level as they need to get more gas under their control to ensure they have security of supply.” He says that smaller players are already anticipating this demand.
“A whole bunch of junior explorers are out there looking for coal-seam- gas. What they’re doing is looking to secure permits and then firm up reserves within those permits and the principal reason for doing that is to try and attract the attention of a major to buy them out. “You can only have a few projects because there’s only so much gas to go around,” says Walker.
“You’ll see large companies buying smaller ones as they set footprints on permits and gas but you’ll eventually see consolidation amongst the majors themselves. I think there’s not enough room in the market for everyone to sit there and be commercially viable given the size of these multi-billion dollar projects. Now who the final players are is open to all kinds of conjecture; no-one knows.”
As the large players step up their LNG projects, lawyers are also noticing a positive impact on mining service providers. “There’s a lot of jockeying around the support industries – companies that provide relevant infrastructure such as drilling – there’s a lot of jockeying going on around those people in terms of getting themselves into a position to be able to provide those services and that I suspect will lead to some M&A activity,” Walker predicts.
While coal-seam-gas is the topic du jour in Queensland, there is no shortage of mega-project activity located elsewhere. For example, Woodside has, among other projects, its Pluto and Browse LNG projects in WA, collectively worth in the vicinity of A$42bn. These plans have spun off legal work such as last year’s A$2.5bn capital raising which was facilitated by Freehills (Woodside) and Mallesons (advising the underwriters and lead managers). The Woodside project follows on from Chevron’s A$50bn Gorgon gas project.
Mallesons partner Paul Lingard says that offshore LNG activity is set to become a focal point of interest because of advances in technology. “Floating LNG is a possibility now. Previously, you had to bring gas on shore and then run it through an LNG plant – if your deposits were a long way from the coast, then it was prohibitively expensive to bring onshore and process,” he says.
“Floating LNG allows you to effectively construct a plant on a ship and bring it from field to field, which allows you to access lots of deposits that are a long way offshore. So that will be an exciting trend in that space – it will allow them to open up vast tracts of area off the coast which previously have gone untapped – and it also allows you to bring on smaller fields.”
The Hong Kong Stock Exchange has revised its listing rules in an attempt to promote itself to resources companies and make it easier for these companies to list in Hong Kong. Well-known Perth resources lawyer Michael Blakiston is interested in the possibilities this opens up for dual listing, and says that some of his clients are already showing an interest in this option. He is excited by the potential.
“This will open up Australia to the South-East Asian region even more than it has. Some might say that [investors] can come through the ASX, but that’s a real narrow view. You really have to make it easy for people to invest and they’re used to [the Hong Kong] market – it’s been incredibly successful in other sectors,” he says. “We’re starting to see people applying their effort to get listed. Although it is expensive and it does take time, it shows signs of getting momentum.”
Blakiston says there is a clear rationale for mining companies to consider listing in Hong Kong. “I know it sounds like an odd statement, but traditionally, the Chinese haven’t been big investors into mining stocks,” he says. “Hong Kong is clearly a source of Asian capital and a central point, so they’ve opened up this part of their operation to attract Chinese capital.”
“It’s going to be a huge area because if you’ve got any company that’s got a Chinese flavour in the sense of a Chinese JV partner or Chinese involvement in the project, to have the ability to trade up in that part of the world is very significant. I’m seeing a potential for a significant amount of work coming out of that area,” he says.
Mallesons’ Lingard points out that the flow of work relating to dual listings is a two way street. “What we’ve historically seen is Australian companies looking to list elsewhere but similarly, I think there’s potential out there for people to list in Australia as well as off the back of a dual listing,” he says. “Either way, I don’t think it’s going to form a big part of the next 12 months, but it is always possible. The issue is having that sufficient nexus to mining which will really bring people in the door.”
He predicts increasing competition among exchanges in Canada, London, the US and Australasia for resources IPOs. “For capital-intensive projects, there is clear value for clients in putting their name on multiple exchanges,” he observes. “There are some interesting times ahead with the interplay for mining companies.”
While there is anecdotal evidence that Australian junior miners in particular are showing an interest in dual listings, Hebert Geer partner Jayne Steele notes that the process can be complicated. “Reserve resource reporting standards are different at some Asian exchanges and it may take some time for Australian companies to accommodate that,” she observes. “Also, while there is expected to be an investor appetite for Australian exploration companies, I’m not sure of the extent to which this will go beyond coal and iron ore and whether there is the same level of opportunity for juniors in base metals or other commodities.”
‘Coal, iron ore, China and India’ are the five buzzwords of the resources boom and the reasons why – energy security and steel production – have been well documented. It is a pattern which is unlikely to change in the near future, although some are sounding a note of caution. “When China sneezes, the world gets a cold – the concern is that this year might be the year that the cold develops,” observes Allens Arthur Robinson’s Scott Langford.
In the meantime, there is plenty of enthusiasm for keeping China supplied with bulk commodities, which raises interesting questions about where prices are headed in the long run. “Iron ore has led the charge and there is a view that it will be the first to start to see the impact of increased production. There’s been a huge push to get as much product to market as possible,” says Langford.
Indeed, there has been no shortage of activity in the iron ore space. “Lots of companies have large deposits which have been fairly well explored and it’s about sequencing them into production – for example, in the Pilbara or the mid-west,” Langford says. “The mid-west is a good example. They had nine deposits of iron ore for over 20 or 30 years and it’s just now getting enough momentum and the prices are right to bring it online – the demand is there. So that’s an exciting new chapter for WA in particular.”
Lingard predicts more M&A activity in the iron ore space, although he says that uncertainty surrounding the proposed MRRT is a deterrent. The junior iron ore space, in particular, is seen to be ripe for M&A. The latest developments include manoeuvres between BC Iron and Hong Kong-listed Regent Pacific Group, and Hong Kong-listed Wah Nam’s simultaneous bids for Brockman Resources and FerrAus. Clayton Utz advised Wah Nam on its simultaneous bids, while AAR advised FerrAus and Freehills advised Brockman.
Coal is similarly subject to interest from overseas, with recent highlights being Thailand-based Banpu’s A$2.5bn acquisition of Centennial Coal, a deal facilitated by Norton Rose (Banpu) and Freehills (Centennial Coal) and Indian-based Adani’s acquisition of coal tenements from Linc, a deal facilitated by Corrs (Adani) and Norton Rose (Linc).
But the difficulty faced by exporters of commodities such as coal and iron ore is a lack of infrastructure to transport and load the product onto ships. A number of expansion projects are on the horizon, such as the Oakajee port and rail facility in WA and expansion of the facilities in Newcastle NSW – projects which are generating legal work even at the planning stages.
“We are capacity constrained and the burgeoning commodity industry needs access to port and rail,” says Blakiston. “Companies want to get access to [these facilities]… some of the work
is pre-regulatory because the formal regulatory regime only comes in once you’ve got the built asset. So people get a chance to negotiate their position during construction, but after you’ve then got a regulatory regime and all those things that apply.”
There is concern from miners about the Federal Government’s capacity to deliver certain outcomes on the issue of the Mineral Resources Rent Tax (MRRT). “The government is finely balanced [politically],” says Langford. “The concern is whether there will ultimately be policy gridlock on that front – and also on climate change; we may end up in exactly the same position in 5 year’s time as we are now.”
Langford admits that, despite the uncertainty, resources projects are still continuing. “But it won’t take that much for there to be an impact on net investment dollars,” he warns. “These companies have a global suite of assets and a very disciplined value-based approach as to where the investment dollars go.”
Mallesons’ Lingard says that his perception was that some miners were holding off decisions until the MRRT issue was resolved and that the uncertainty was also impeding M&A. “At the moment it is difficult to value these projects in a way that everyone would be comfortable with and it’s hard to do M&A – not impossible, but more difficult,” he observes. Blakiston says that the government needs to tread carefully.
“Here in the west we’re very sceptical because the whole issue of royalties is a big one. The mining tax is looking to limit the ability of the states to collect royalties. The minerals belong to the state – they don’t belong to the Commonwealth,” he says. “The right to gain benefit should be a state right. If the Commonwealth is not careful there will clearly be a constitutional challenge – the premier has gone on record as having said it.”
Blakiston compares the situation with his experience in developing countries. “When you’re advising in developing countries, one of the key things you try and tie governments down to is not to change the rules part-way through. Well here we are in Australia and that’s exactly what we’re doing,” he says.