Buyers drawn to a new shine on coal

FINANCIAL backers Michael Addison and Simon Kidston profit in finding beauty in unloved coal assets.

Buyers drawn to a new shine on coal

MINING success stories are generally full of colour. Just ask experienced financial backers Michael Addison and Simon Kidston who once tracked down a prawn fisherman to convince him to sell them coal tenements, which were developed into an asset the Chinese bought for $75 million.

Addison, who was a Rhodes Scholar at Oxford University with Tony Abbott and has a rich history in merchant banking, teamed up with Kidston 10 years ago to target opportunities they could flip from prospects into sought-after assets.

The strategy seems simple. Find an asset, offer the owner a share-plus-cash deal, secure seed capital, float the company, drill out the asset and make it an attractive target.

But what you cannot control in the world of resources is market conditions and Addison and Kidston have been through the global financial crisis, a downturn in the coal price and economic headwinds that are clearly out of their control.

While they have been fortunate enough to have had two profitable exits from coal companies over the past six years, Addison says there is no longer free capital being thrown at resources. There has been a strong move to the IT sector.

But he believes there are still good stories to tell in the metallurgical coal space and he is hoping their private coal interest in Queensland's Bowen Basin, which has a joint venture with Gina Rinehart's Hancock Prospecting, will prove to be another profitable win for the investment team.

Addison, 56, has a pedigree in investment banking and worked in London, Johannesburg and Hong Kong. He sits on the board of some of his interests. Kidston, 44, started with Macquarie Bank in Sydney before heading to Asia and London and is a founding director of boutique investment bank Helmsec Global Capital. He is also on the boards of some of the mining interests he backs.

"Our core skills are identifying quality assets and ones where we can bring our expertise to play, which is putting good management teams around those assets, attracting capital to fund the assets and managing the company to a takeover or corporate event," Kidston said. The two didn't have a background in resources when they started but as Addison explains, "the backbone of Australian industry is the mining industry", so it was the sector -- with a focus on coal -- the two targeted from the outset.

"My philosophy is there is a good living to be made at the feet of the giants," Addison said.

"When we kicked out on the coal journey in 2008, coal was on the incline and it was an attractive asset to go into."

Kidston says that in 2008 -- pre-global financial crisis -- they took the view that coal prices would be elevated relative to historical norms because of the fundamental strength of the Asian economies, which was the case for their first few years in the sector.

Their first success story -- Endocoal -- was born in 2008 when they identified tenements in Queensland belonging to two men from Newcastle, who they approached with a share-and-cash deal.

Addison and Kidston have formed a network of people and institutions who are prepared to back the two at an early stage, providing seed capital to prove up assets before an initial public offering.

Endocoal was capitalised in early 2008, then the GFC hit and plans for an IPO were delayed. Having raised $3m prior to listing, the management team in place worked on exploration, so when it finally did list in April 2010, the company had a defined resource. It raised $17m when it floated and two years later it sold to Chinese-backed U&D Mining Industry for $72m.

They exited Endocoal in 2010 and turned their attention to another coal venture, Carabella, in April that year.

A prawn fisherman who pegs tenements in his spare time had some ground in the Bowen Basin the duo were interested in, so they tracked him down, flew to Perth with a term sheet, which he viewed at 4pm and signed by midnight on the same day.

"When we signed the transaction we thought we'd have a small naming ceremony and we asked him the name of his fishing boats and one of them was called Carabella," Addison recalls.

The team raised $2m pre-IPO. Both men reinvested some of their windfall from Endocoal and early investors in Endocoal were again keen to back them.

Carabella listed on December 17, 2010, and was one of the star floats of that year having listed at 40c to close at 78c on the first day of trade. During the boom of the coal market the stock went as high as $3 in the second quarter of 2011, pushing the exploration company into the ASX 300.

"We were in the stage of the cycle in late 2013 where we were in a difficult coal market but were on the cusp of achieving substantial uplift and getting into production and this Chinese group, China Kingho, realised that and they pounced," Addison said.

The privately owned Beijing coalminer launched a 42c-a-share bid in early December last year in a move that Addison says was well managed by Deutsche Bank.

"There was nothing we could do to stop it," he said. "They phoned our chairman and said they had acquired 11 per cent of the company on market and were launching a bid for the company in the morning."

Kidston adds that they had met the Chinese company three months before that but as they had met many Chinese groups in the proceeding two years, they thought it was just a general inquiry.

The board got them to lift the bid to 45.5c -- valuing the company at $75m -- and given the stock was trading at 20c, the offer was accepted.

"As much as we didn't want to part with the company at that price it was such a premium to the share price that as a board we would've been in difficulty if we didn't recommend it," Addison said.

He said it has been a "rough ride" working their way through currency, financial and commodity price cycles and that capital is now becoming harder to attract for coal assets.

The Chinese are still shopping in the resources space but they are using the difficult market conditions to be selective. Kidston says the Chinese are looking at assets that have gone through the high risk exploration phase with approvals pending and are just awaiting the capital to get into production.

For these experienced financial backers the ten-year ride so far has been a massive learning curve and they have refined their shopping list, which Addison says includes metallurgical coal, near existing infrastructure and a close to surface deposit.

He and Kidston's metallurgical coal play focused in Queensland's Bowen Basin, Scott Creek Coal, ticks those boxes. They have raised $4.25m and the company has 83 shareholders but the venture has unfortunately been caught in a declining coal market, so an IPO has not been attempted.

The quality of the assets attracted Gina Rinehart's Hancock Prospecting though, which has agreed to spend $2.5m on exploration to earn a 51 per cent stake in the company's flagship project.

Given the market conditions, it is likely the company will be farmed into an existing listed vehicle, rather than attempt a float.

With Scott Creek Coal's outlook promising, Addison and Kidston are focusing their attention on a new venture, one they aren't yet ready to go public with, other than to say they will be leveraging their expertise in resources but that it won't be a straight resources play.