FORTESCUE's rail network in the Pilabara, the idea behind Atrum Coal's new financing model for its Groundhog project in Western Canada.

FORTESCUE's rail network in the Pilabara, the idea behind Atrum Coal's new financing model for its Groundhog project in Western Canada.

Atrum Masterminds New Financing Model for Groundhog

Issue 83, May 2014

Atrum Coal, Australia’s top performing mining stock of 2013, has announced a radical new financing structure for its giant Groundhog anthracite deposit in British Columbia.

The company announced a pre-feasibility study for Groundhog this week showing that cap-ex of $77m, expected to be fully financed by off-take deals and debt, is projected to ramp-up the mine to 5.4m tonnes per annum at thumping margins of $100 per tonne. The study covers only 5 per cent of Groundhog and only 2 of its 20 seams. “The results speak for themselves,” said managing director, Eric Lilford.

In exchange for a service fee, power lines, road haulage capital costs and a possible rail option would be covered by an Atrum subsidiary due to be spun-out to investors, the company said, avoiding equity dilution by “quarantining” capital expenditure.

The mechanism turns the capital burden of infrastructure costs into a utility-like investment in its own right, able to raise borrowing against long term contracted income. “You are dealing with different types of investors,” says director Russell Moran. “Those seeking lower but more stable returns with strong tangible asset backing to the business. Building a mine, you are looking at shorter debt instrument terms at higher rates.”

The model he says is part based on iron ore giant Fortescue, which raised capital for its railway network in the Pilbara through a subsidiary, ring-fencing the capital outlay. “The difference for Atrum is that [we are looking] at a much smaller infrastructure spend and we are considering spinning out the business as a standalone business that will seek out secondary customers.”

A 200km railway linking Groundhog to Port Stewart would also cross the line to the coal port of Prince George, doubling as a potentially lucrative link between Port Stewart and Western Canada’s major coal basins.

Moran says the service fee paid by Atrum to any spin-out would be similar to the operating costs of owning the infrastructure itself, with savings such as lower borrowing costs being split between profit for the spin-out and savings for the mine. “BC hydropower, which is what new power lines would unlock, is some of the cheapest environmentally friendly power on the planet.”

“You are dealing with different types of investors.”

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