Ground Breakers: US15 million bucks for a ‘world class’ asset? Only in coal

South32 will receive an initial payment of just US$15 million ($23m) for its 50% share in the Eagle Downs met coal project in Queensland’s Bowen Basin
It’s the latest acquisition for $3.3 billion Stanmore, which emerged as one of Australia’s top coal miners after buying BHP’s stake in the Poitrel and South Walker Creek mines two years ago
S32 has shifted to battery metals since its spin-out from BHP in 2015

Stanmore Resources (ASX:SMR) may have pulled off a deal to rival its founding success, nabbing 50% of the Eagle Downs coal mine in Queensland’s Bowen Basin from South32 (ASX:S32) for an initial US$15 million ($23 million).

It is also in talks with Aquila, a subsidiary of China’s biggest steelmaker Baowu, to take a further 30% stake via a restructure of the JV, in a bid to bring the operation back to life after pre-production activities were stalled in 2015.

Since then the market for metallurgical coal has transformed with Chinese steel production reaching new heights and a lack of investment in new supplies helping send benchmark prices to over US$300/t, with Baowu’s desire to support an investment likely stronger since the removal of restrictions last year on the export of Aussie coal to China.

Stanmore famously made its first fortune at the Isaac Plains mine in Queensland, paying Vale and Sumitomo just $1 — that’s right $1 — to take the asset and its $32m environmental legacy off their hands.

Later backed by Indonesia’s Widjaja dynasty, Stanmore has emerged as one of the largest sellers of PCI and semi-soft coking coal in the world after buying BHP’s (ASX:BHP) Poitrel and South Walker Creek mines in 2022 for up to US$1.35 billion, taking full control later that year after acquiring Japanese trading house Mitsui’s 20% minority holding in a further US$380m deal.

Eagle Downs is an altogether different proposition because it has yet to be developed. But with a mine life of potentially over 40 years (producing 4-6Mtpa) and its proximity to Stanmore’s existing assets and infrastructure, the project is attractive to Stanmore, which has less than 10 years of mine life remaining at Poitrel.

“Stanmore is uniquely positioned to leverage our existing infrastructure portfolio at Poitrel and Isaac Plains to support an optimised development plan for the project, and utilise our existing rail and port capacity as a key investment enabler,” SMR’s MD Marcelo Matos said.

“Eagle Downs also has strong strategic fit in our portfolio, extending the life of our operations in the area given the relatively shorter mine life at Poitrel and the Isaac Plains Complex.

“This is in line with our commitment to developing options for expanding and increasing the longevity of our business in the area by leveraging our strong existing infrastructure position.”

South32’s coal transition

The sale could net South32 more payments down the line, with its half share of the 1.14Bt deposit — expected to produce premium low-vol hard coking coal — also subject to a US$20m payment once the first 100,000t of coal has been mined via longwall mining methods.

A capped royalty of US$100m will be payable in the future, dependent on coal prices.

It follows South32’s decision in August last year to dump a controversial US$700 million extension of its Dendrobium mine, part of the Illawarra coal operations in regional New South Wales, where opposition had centred on the impact the mine’s expansion could have on Sydney’s water supply.

The company, a spin-out of assets BHP wanted to get rid of during the last major mining downturn in 2015 mockingly called CrapCo ahead of its listing, has increasingly focused on battery and energy transition metals in recent years.

MD Graham Kerr has flagged major spending on the more than US$1.5 billion Taylor zinc deposit in Arizona, where a battery manganese project could also be developed at the nearby Clark deposit. S32 also offered US$1.55 billion in 2021 for 45% of the Sierra Gorda copper mine in Chile, while it is also among the largest alumina, aluminium and manganese producers on the ASX and boasts the Cannington mine in Queensland — one of biggest silver and lead producers globally.

Its Eagle Downs project has been up for sale in various forms in recent years, with a new process kicked off by Macquarie Capital last year after BHP announced it would net up to $6.4 billion for the sale of its Daunia and Blackwater met coal mines to Whitehaven Coal (ASX:WHC).

$14 billion S32 has seen its shares fall 32% over the past year as the fortunes of battery and base metals have been hammered in the past year. S32 also flagged the review of its Cerro Matoso ferronickel mine in Colombia amid a weakening of nickel prices, and because its product tends to eat a big discount to already struggling LME nickel prices.

$3.3b SMR meanwhile has been stable in the past year and is up over 270% in the past five years, its value hitting an inflection point after sealing its acquisition of BHP’s BMC stake. It is expecting to produce 12.3-13Mt of saleable coal from SWC (5.8-6Mt), Poitrel (3.9-4.1Mt) and Isaac Plains (2.6-2.9Mt) in 2024.

Both SMR and S32 were down over 1% this morning.

It came amid a 0.74% fall for the materials sector in early trade, with lower iron ore and base metals prices keeping ASX resources stocks broadly in the red.