Jaffe Lau, CEO, Abterra. Photo by Sim Kih

JUST THREE months ago, Abterra Ltd announced the RMB 188 million purchase of a 49% stake in a coking coal mine in Shanxi province which has access to 50.3 million tonnes of coal. 

In the latest acquisition, the Singapore-headquartered company said last night that it has entered into a sales and purchase agreement to acquire a 30.6% stake in Shanxi Lingshi
Fuyuan Coal Co.

Fuyuan owns a coking coal mine spanning approximately 5.434
sq km in Jinzhong city, Lingshi county.

This purchase weighed in at RMB234.8 million for a mine that has 33.36 million tonnes of coking coal reserves.

Fuyuan also holds a mining licence till January 2012, which permits a production capacity of 210,000 tonnes per annum.

“The mine produces high quality semi-hard coking coal, which commands higher selling prices in the market. We believe Lingshi Coal Mine will prove to be a strategic acquisition for Abterra as we strengthen our position as one of the leading coking coal mine companies in the Shanxi province. We are on track to achieve our target of having 5 million tonnes of production capacity per annum,”said Mr Lau Yu, CEO of Abterra.

The latest acquisition is the third coking coal mine in which Abterra has acquired stakes as it moves upstream from its role as a trader of commodiities such as iron ore and coking coal.

Coking coal is more rare and valuable compared to thermal coal.  The Abterra group of companies has the know-how and distribution network for the commodity, accumulated in over 20 years in the trade.

In a research report dated May 2009, Goldman Sachs highlighted that PRC coking coal supply is tight as the Shanxi government cracked down on small mines over safety issues.

Over 50% of China’s supply comes from Shanxi province, and over 75% of Shanxi’s supply is from small mines, mainly located in Central and Southern Shanxi.

”Mines in Shanxi are currently undergoing consolidation and it is our strategy to be a coalmine operator of significant scale there,” said Abterra's Mr Lau in a telephone interview from Hong Kong with NextInsight and other media.

Abterra is transforming into a mine owner.

Goldman Sachs is forecasting that the spot coking coal price to average RMB1,080/t for 2009 and up 10% yoy to RMB1,188/t for 2010.

After acquisition No.3, Abterra is still in hot pursuit of more.

“Abterra is in the mist of discussions with mainland Chinese banks and investors regarding the financing of more acquisitions. The Chinese investors are more familiar with the robust growth of the resources industry in China and are eager to support us in our growth strategy,” said Mr Lau.

He added: “The Group is embarking on a new era of sustainable growth, supported by our twin engines of mining and trading. China’s unsatisfying appetite for resources will provide huge opportunities for the Group in the coming years!”

The CEO believes that asset prices in China for coalmines will go up to Australian levels after the industry consolidation.

Here are highlights of the Q&A yesterday evening
with Mr Lau on the phone from Hong Kong, where he is based:

Q: Who are you acquiring the mine from?

A: A Shenzhen company. We purchased Jiaozhong (the mine acquired three months ago) from them. This is the second mine we are purchasing from the same owner.

Q: Did you get to know the seller through your parent company, General Nice?

A: Yes, we got to know them through our General Nice in China.

Jaffe Lau, CEO, Abterra

Q: Do you intend to seek approval for greater capacity as you have done for Jiaozhong?

A: Fu Yuan will either seek for capacity upgrade on its own or form a co-operative with other mine operators within the vicinity for a joint capacity of more than 3 million tons a year.

We are not taking a controlling stake because of regulatory restrictions on foreign control.

We have a strong network in Shanxi, which allows us to acquire stakes in mine operators.

We will seek co-operation with bigger mines in Shanxi and rely on their clout to get benefits.
  For example, we own marketing rights for all of Yongxing’s 900,000 tonnes of coking coal production capacity even though our stake is only 15%.

Q: When can you commence operations?

A: All mines in Shanxi have been temporarily closed since May, until mining licenses are awarded in the next 2 to 3 weeks.

Q: Are you looking to buy more mines after this one?

A: Definitely, if funding is available. Like what we have said previously, our target is to have total capacity of 5 million tons of coking coal p.a. in 2 to 3 years.

Q: What is your current capacity for coking coal?

A: Currently we already own 2 coalmines – Jiaozhong and Yongxin
g.  Current capacity for Yongxing is 900,000 tons a year, and we are targeting for this to increase to 1.5 million tons in the coming year.  We completed the acquisition of Jiaozhong in May.  The capacity of Jiaozhong is 150,000 tons, and we hope to increase this to 900,000 tons.

Mining profit is not reflected in Abterra’s 1H09 results, but will be reflected in 2H09 as the acquisition was in May.  We expect our mine acquisitions to contribute to the Group's bottomline in the later half of this year.

Q: What are the current prices for coking coal?

A: Current coking coal prices are currently about Rmb 800 per ton, up 50% from beginning of the year.  With production costs averaging around RMB 250 per tonne, this works out to a profit of 60+%. Demand is picking up, mainly from China’s domestic market.

Iron Ore Mines

Q: What are your plans for acquiring stakes in iron ore mines?

A: We are looking to acquire 22.8% in Zuoquan Xinrui, an iron ore mine operator, by 4Q09.  We want to increase our stake to 50% or more now that iron ore demand is picking up in China, Europe and America.  There was a sharp surge in iron ore prices from about Rmb 70 to about Rmb 105-110 per tonne in the past 2 months.  We foresee prices will stabilize around Rmb 90-100 in the next half a year.

Q: How much do you need for expanding your capacity?

A:  We are budgeting S$100 million for 2009-2010 for Jiao Z
hong.  We may raise funds from banks or capital markets, e.g. share placement or issue of convertible bonds. We do not have borrowings for mining expansion as yet.

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