May 2013

Aquila Resources
West Pilbara Iron Ore Project
Project Finance Study

Melb. Consulting

Address: Melb. Consulting 198 Berkeley Street Victoria 3010, Australia

West Pilbara Iron Ore Project (Aquila Resources)

Group Members Name 1. 2. 3. 4. 5. Xiaolin Hu Mengjie Ni Yalei Cao Congcong Su Nguyen Hong Hiep FNCE90048 Project Finance

Student Number 578974 571107 557841 576424 595502

Subject Name Case Selected Due Date

Aquila Resources $7.4 b Iron Ore Project WA Tuesday, May 14 (12:30pm)

We certify that: 1. This submission is our own original work. 2. This submission is based on our own research. 3. All sources used by us have been documented. 4. This piece of work has not previously been submitted for assessment in this or any other subject.

West Pilbara Iron Ore Project (Aquila Resources) EXECUTIVE SUMMARY

The purpose of this report is to conduct an in-depth analysis of West Pilbara Iron Ore Project (WPIOP), identify key risk factors for WPIOP and evaluate corresponding risk mitigation strategies. Comparable projects are also discussed in this report to further analyse risks of WPIOP, followed by recommendations to sponsors. The Project WPIOP is a greenfield iron ore mine in Western Australia, the flagship project of Aquila Resources Limited. WPIOP is managed by API Management Pty Ltd for APIJV (Aquila/ AMCI) and currently in progress of stage one. The WPIOP is located in the Pilbara region of Western Australia, based on iron ore deposits approximately 30 km to 85 km south west of Pannawonica. The amount of funding required to complete WPIOP is estimated around 7.4 bn. Project risks are assessed according to the degree and probability of the adverse results that are anticipated to take place. Risks are categorized in High, Medium or Low based on the degree of likelihood. According to the level of priority, 5 major project risks are further discussed in this report: Financial Risk Operating Risk Environmental Risk Credit Risk Construction and Development Risk Risk analysis and risk mitigation strategies were developed after the risk assessment. Utilising necessary financial instruments such as future, swap and option, diversifying source of financing the project are key strategies to manage commodity price volatility, hedge foreign exchange risks, reduce refinancing risk for financial risk mitigation purpose. Regarding operating risks, long-term take or pay agreement and iron ore derivatives are the methods to mitigate risk. Mitigation strategies for environmental risk cover detail plans with regard to environmental factors, such as troglofauna, terrestrial fauna and vegetation. Using external credit ratings, developing internal credit ratings for customers and utilising trade finance are ways to better manage credit risk. Additionally, in terms of construction risks, it is possible to transfer risks to other parties by long term fixed contracts. Collaboration is a good way to cut down capital expenditure and generate further revenues. SWOT analysis further evaluates the strength, weakness, market opportunities and threats of WPIOP, works out internal and external factors that influence this project as well as gains insight into the potential and significant issues affecting WPIOP. Comparable projects from Rio Tinto and Roy Hill Iron Ore Mine are analysed to better understand WPIOPs relative positioning among peer projects. Lessons are summarised from comparison with other projects. At the end of this report, some recommendations are given regarding to a variety of mitigation strategies to minimize the negative effects associated with those risks identified and providing insurance to some extents ensuring the final success of this large project of Aquila.

West Pilbara Iron Ore Project (Aquila Resources)

Table of Contents
EXECUTIVE SUMMARY ................................................................................................................... 2 1 INTRODUCTION ......................................................................................................................... 5 1.1 1.2 Background ............................................................................................................................. 5 Project Overview ..................................................................................................................... 5

1.2.1 Construction timeline and project products .......................................................................... 5 1.2.2 Project development.............................................................................................................. 5 1.3 Project Structure ...................................................................................................................... 6 1.3.1 Joint venture structure ........................................................................................................... 6 1.3.2 Third parties .......................................................................................................................... 6 1.3.3 Customers ............................................................................................................................. 6 1.3.4 Funding Sources.................................................................................................................... 7 2 RISK IDENTIFICATION ............................................................................................................. 8 2.1 Risk Categorization ...................................................................................................................... 8 2.2 Key risks in Aquila Resources Iron Ore Project .......................................................................... 9 3 PROJECT RISK AND RISK MITIGATION .............................................................................. 10 3.1 Financial Risk ........................................................................................................................ 10 3.1.1 Commodity Price Risk ........................................................................................................ 10 3.1.2 Foreign Exchange Rate Risk ............................................................................................... 11 3.1.3 Refinancing Risk ................................................................................................................. 11 3.2 Operating Risk....................................................................................................................... 12 3.2.1 Market Risk ......................................................................................................................... 12 3.2.2 Competition Risk ................................................................................................................ 13 3.2.3 Accessibility Risk ............................................................................................................... 14 3.2 Environmental Risk ............................................................................................................... 14 3.3.1 Risk Analysis ...................................................................................................................... 14 3.3.2 Mitigation Strategies ........................................................................................................... 16 3.4 Credit Risk............................................................................................................................. 17 3.4.1 Risk Analysis ...................................................................................................................... 17 3.4.2 Mitigation Strategies ........................................................................................................... 18 3.5 Construction and Development Risk..................................................................................... 19 3.5.1 Risk Analysis ...................................................................................................................... 19 3.5.2 Mitigation Strategies ........................................................................................................... 19 4 5 SWOT ANALYSIS ..................................................................................................................... 20 COMPARISON WITH OTHER PROJECTS ............................................................................. 21 3

West Pilbara Iron Ore Project (Aquila Resources) 5.1 Pilbara iron ore project, Rio Tinto ............................................................................................. 22 5.2 Roy Hill Iron Ore Mine, Hancock Prospecting, Posco & KJTC ............................................... 22 5.3 Lessons ....................................................................................................................................... 23 6 CONCLUSION AND RECOMMENDATIONS ........................................................................ 24 REFERENCES .................................................................................................................................... 25 Appendix A .......................................................................................................................................... 28 Appendix B .......................................................................................................................................... 28

West Pilbara Iron Ore Project (Aquila Resources) 1 INTRODUCTION

1.1 Background
The West Pilbara Iron Ore Project is a substantial iron ore export operation proposed for the Pilbara region of Western Australia. The project is currently in the first stage of development that covers an area of 9000 km2 based initially on pisolite iron ore deposits. There are several open-cut mining deposits of iron-ore (hematite) spread over 60 kilometers, which are located 30 km to 85 km south west of Pannawonica. The estimate total base case capital cost has gone up to $7.4 billion due to additional costs in implementing Anketell Port Master Plan. Operating costs have increased to $24.20 per dry metric ton in the entire life cycle of the project. This stage includes the construction and development of eight mining area and a 282 kilometers of heavy haul railway infrastructure and a multi-user deep-water port at Anketell Point. There will be three mining hubs, to be known as North, Central and South. The annual production is expected to reach 30 million tons, for 15 years (Aquila Resources, 2012).

1.2

Project Overview

1.2.1 Construction timeline and project products Construction is expected to commence in the early of 2014, with the first ore on ship in 2017 (Aquila Resources, 2012). Products are direct ship channel iron and bedded iron fines. 1.2.2 Project development December 2011, stage one conditional State and Federal environmental approvals for Mine and Rail were received and in February 2013, State environmental approval was received for Anketell Port. Mining Lease application has already been submitted. June 2012 feasibility Studies for the Mt Stuart Iron Ore Joint Venture and the Red Hill Iron Ore Joint Venture confirmed the technical and economic viability of two key iron ore suppliers to the West Pilbara Iron Ore Project. Granted Major Project Facilitation status by the Federal Government. Total Mineral Resource Estimate for the West Pilbara Iron Ore Project and wider Pilbara 5

West Pilbara Iron Ore Project (Aquila Resources) tenements now increased to 2,233Mt. Dispute between Aquila Resources and AMCI (IO) Pty Ltd in terms of proposed budget was resolved. Native Title negotiations with relevant Aboriginal groups are progressing.

1.3

Project Structure

1.3.1 Joint venture structure

WPIOP is managed by Australian Premium Iron (API), which is equally (50:50) owned by Aquila Resources and American Metals and Coal International (AMCI), a private global mining investment company.

The West Pilbara Iron Ore Project Stage one includes (API, 2013): Project West Pilbara - Red Hill Iron Ore Project West Pilbara - Mt Stuart Iron Ore Project
.

Parties API & Red Hill Iron Limited API & Cullen Resources Limited

Participating Interests API 60% earning up to 80% API 70%

1.3.2 Third parties The project is developed under multi-user facility, involving Fortescue Metals Group (FMG) and China Metallurgical Group Corporation (MCC) (ASX, 2010).

1.3.3 Customers Memorandum of Understanding was executed, taking the total of 40 MoU with steel mills in China, Japan, Korea and Taiwan (ASX, 2010). Baosteel, the largest iron and steel conglomerate in China and a major shareholder of Aquila Resource, is actively participated in this project to secure a long-term supply of steel raw materials

West Pilbara Iron Ore Project (Aquila Resources) 1.3.4 Funding Sources Aquila Resource has settled down $250m 12 month unsecured Corporate Facility with NAB and CBA (ASX, 2011). Aqulia signed a Memorandum of Understanding with China Development Bank Corporation (CDB), which provides potential opportunities to secure long-term financing from CDB.

Lenders NAB CBA CDB Other international banks

Regulators State Government Federal Government Environmental Protection Authority Other regulations

Debt

Repayment

Major Contractors
Infrastructure - Worley Parsons Rail Facilities Calibre/Engenium Marine Facilities Aecom AECOM

Equity Sponsors API (Aquila & AMCI) Red Hill Iron Limited Cullen Resources Limited

West Pilbara Iron Ore Project

Dividend Cooperation Consulting service Third Parties FMG MCC

Strong mills support - 40 MoU signed with Chinese, Japanese, Taiwanese and Korean mills.

Consultants Members of the Australian Institute of Mining and Metallurgy Director of ORElogy CSIRO Strategen Environmental Consultants Pty Ltd Aquaterra, Biota Environmental Services

West Pilbara Iron Ore Project (Aquila Resources) 2 RISK IDENTIFICATION

2.1 Risk Categorization

Lists of risks involved in Iron Ore Project WA were assessed. Based on the combination of estimated severity and probability of occurring, the total potential impact was listed below. According to risk rating, risks have been graded as Low Medium and High. The risk matrix was demonstrated in Graph 1.

Graph 1: Risk Matrix 8

West Pilbara Iron Ore Project (Aquila Resources)

2.2 Key risks in Aquila Resources Iron Ore Project

Based on analysis, five major risks were identified and will be discussed further in Part 3. Risk Categories Financial Risk (Sponsors and lenders) Subcategories Commodity Price Risk Foreign exchange rate risk Refinancing risk Operating Risk (Sponsors) Environmental Risk (Sponsors and lenders) Market Risk Competition risk Accessibility Risk Troglofauna Terrestrial fauna & Marine fauna Vegetation and flora Breach of regulations Credit Risk Cost Overrun Delay Infrastructure Risk

Credit Risk (Sponsor and lenders) Construction and Development Risk (Sponors, lenders and contractors)

West Pilbara Iron Ore Project (Aquila Resources) 3 PROJECT RISK AND RISK MITIGATION

3.1

Financial Risk

3.1.1 Commodity Price Risk 3.1.1.1 Risk Analysis Equity markets are becoming increasingly sensitive to macroeconomic news, and for many organizations increases in commodity prices are often not fully impacting share prices, whereas decreases are.

The iron-ore market price had recovered in 2010 and 2011 after being pummelled by the 2008 worldwide economic downturn, with prices hitting highs of $193/ton as steel output reached record levels. The price rally was short-lived as prices dropped sharply in 2012, hitting a three-year low of $86.70/ton in September that year. Prices have since recovered again, but several analysts forecast that the iron-ore sector will experience a difficult period over the following 12 to 18 months, resulting from excess supply and projected slower steel output in China. The long-term outlook for iron-ore remains positive, albeit cautious, with the worlds biggest iron-ore miners Vale, Rio Tinto and BHP Billiton expecting China to be the major demand driver for the mineral until the end of the 2020s, when India and other developing countries are expected to take lead as Chinese growth diminishes.

Figure 1: Prices of iron ore (2009-2016F) Source: KPMG analysis 3.1.1.2 Mitigation Strategies The use of derivatives such as future, swap or option is necessary in this situation to lock in the price as well as to protect project owners from the fluctuated price. 10

West Pilbara Iron Ore Project (Aquila Resources) 3.1.2 Foreign Exchange Rate Risk 3.1.2.1 Risk Analysis The term exchange rate risk here refers to situations in which movements in exchange rates alter the financial performance of firms as measured by conventional financial statements and/or corporate cash flows. The market price of iron ore is denominated in USD while all of the accounting figures of the Aquilas project are calculated in AUD. Hence, the exchange rate between AUD and USD indirectly influences the financial performance of the project. A depreciation of AUD will be good news for the project owners because the price of iron ore in AUD may increase while it remains the same in USD. On the contrary, the increasingly stronger AUD will reduce the returns of Aquila.

3.1.2.2 Mitigation Strategies Similar to the approach in managing the commodity price risk, Aquila should alternatively use derivatives such as future, option, forward or swap to hedge the foreign exchange risk.

3.1.3 Refinancing Risk 3.1.3.1 Risk Analysis There are various manifestations of refinancing risk the cost of finance may be higher than assumed, or it may be unavailable, or only available on terms that are not compatible with the existing transaction structure or documentation. In the absence of measures to mitigate or reallocate the risk, it naturally falls in the first instance on the project (inability to refinance will result in default, and a refinancing on more onerous terms will affect the sponsors return and may necessitate the injection of additional equity), and on the incumbent lenders (who must weigh up their potential exposure on contractor default termination against the prospect that continuing to fund the project may be a loss).

3.1.3.2 Mitigation strategies To mitigate this risk, Aquila should diversify the projects financing sources. Refinancing risk, especially in markets vulnerable to a credit crunch or in which long-term maturities are not available, 11

West Pilbara Iron Ore Project (Aquila Resources) a combination of bank loans, bonds fully enhanced or wrapped, unenhanced bonds, and domestic and international credit, among other sources, can mitigate refinancing risk.

3.2

Operating Risk

3.2.1 Market Risk 3.2.1.1 Risk Analysis Given the final output of this project, the volatility in market demand for iron ore as well as its price changes primarily constitutes the market risk. Based on Australia Iron Ore Report (IBISWorld, 2012), world demand for steel directly affects the demand for iron ore. The largest consumer for WA iron ore is Chinese steel manufacturer that makes up 69% of iron ore export (Hart, 2011). However, Chinese demand for the steelmaking raw material is slowing down in recent years (Xu, 2011). The volume of iron ore exported would drop (Power, 2011). Currently, there is an oversupply of global iron ore. China Mining Report (2011) expects that Rio Tinto would duplicate its production by 2015. The iron ore production in Australia is forecasted to reach 630 million tones in 2015 (India Shipping Report, 2011). In addition, the Australian Bureau of Resources and Energy (BREE, 2013) forecasts that iron ore export will increase to 831 million tones due to higher exports from Brazil (the worlds second-largest iron ore exporter). An uptick in global iron ore supply and slackening Chinese demand have underpinned bearish sentiment about the future of iron ore price, which will reach $90 per tonne by 2018 against the current price of about $150 (BREE, 2013).

3.2.1.2 Mitigation Strategies Long-term take or pay agreement can be used to guarantee the volume of iron ore to be produced and exported; Contract price can be negotiated between Aquila and its major consumers like China and Japan on 12

West Pilbara Iron Ore Project (Aquila Resources) an annual base to reflect the market conditions (IBISWorld, 2012); Iron ore derivatives like forward, swap and option can be used to lock price or mitigate the loss otherwise occurs (Madsen & Tseng, 2012).

3.2.2 Competition Risk 3.2.2.1 Risk Analysis Local producers not only compete against each other, but also against operators in other countries--thats a global competition in iron ore mining industry (Fielding, 2013). The world competition in iron ore mining industry increased a lot in recent years and especially the expansion of exports from Brazil (BREE, 2013) impacts the Australian miners. In addition, the competition in local place is also intense given the outperformance of the leading companies, e.g. BHP and Rio Tinto secure a premium for their iron ore from Asian consumers due to lower shipping costs (IBISWorld, 2012). Higher competition implies higher volatility in business operations.

3.2.2.2 Mitigation Strategies Competition-intensive mission/objective should be constituted that drive appropriate strategies; Lower cost strategy can be applied by controlling variety costs including material, workforce, capital expenditure and shipping to avoid a weak competition status that may result in market share losing (Middelbeek, 2012 & Tseng, 2012); Establishing and keeping stable relationships and links with local and overseas steel manufacturers enable miners to access market easily even though during downturn (IBISWorld, 2012).

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West Pilbara Iron Ore Project (Aquila Resources) 3.2.3 Accessibility Risk 3.2.3.1 Risk Analysis For companies like Aquila who do not have their own rail line and water port, they have to access other companies facilities to transport their iron ore to overseas. This will lift the freight cost and as a result, the profit earned by the miner will be lowered or the market share will be reduced if they mark up more on the price (Metal Bulletin, 2013). Additionally, failing to access to other mining companys railway will trigger the accessibility risk that the transportation of iron ore is delayed and sales are stuck (Knox, 2010). Madsen (2013) reported that Rio Tinto had won a legal battle to keep other iron ore producers off its Hamersley and Robe rail lines in Australia. Even though deep-water port and railway is under the current project, there is still a high risk that infrastructure construction cannot be completed.

3.2.3.2 Mitigation Strategies High skill is required in negotiating rail access agreement with leading companies like BHP Billiton (IBISWorld, 2012); Better controlling on construction risk associated the current project to ensure the infrastructure being completed on time (Tseng, 2012).

3.2 Environmental Risk

3.3.1 Risk Analysis In the released Public Environmental Review and Environmental Report, API identified a few major environmental risks based on the likelihood, consequences and confidence levels of predicted impacts (API, 2011). 14

West Pilbara Iron Ore Project (Aquila Resources)

The preliminary risk assessment conducted during the scoping stage indicated that without proper risk mitigation, West Pilbara Iron Ore Project will result in permanent removal of habitat, leading to direct loss and change to troglofauna habitat and mortality of individuals, which is considered as the highest risk imposed.

Terrestrial fauna as well as marine fauna are exposed to high risk due to ground disturbance, removal of habitat, dredging, disposal as well as underwater noise emissions.

Vegetation and flora is at risk due to potential negative impact from clearance of a maximum of 4,970 ha for the mine area and up to 4,550 ha for the transport corridor. The diversity and distribution of flora as well as health of groundwater is threatened. In addition, the aspects and potential impacts of the project may affect eight Priority flora species (Western Botanical, 2010).

Landform and geodiversity is at risk because of ore and overburden removal. The project will potentially result in disturbance or partial loss of an estimated 2.6% of palaeochannel landform.

There are potential impacts on air quality and a possible increase in greenhouse gas emissions.

More strict environmental regulations are imposed on new iron ore projects. Although Project has received primary condition environmental approvals from State and Federal for Main and Rail, it is still waiting for primary Federal approval of Anketell Port. Furthermore, project is also required by legal framework to get secondary approvals. Great deals of investigation and ecological research have to be accomplished before getting approvals. It will generate significant costs to prepare these materials. (ASX Release, 2011&2013)

Any significant, material breach of environment regulations or approval conditions will result in fines or discontinuity of projects (Environmental Defenders Office, 2011).

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West Pilbara Iron Ore Project (Aquila Resources) 3.3.2 Mitigation Strategies

Risk treatments include controls on blasting and hydrocarbons, backfilling and rehabilitating mine pits. Blasting with a low powder factor can be established to ensure stability of pit walls. A troglofauna research program should be developed and 50% of channel iron deposits (potential troglofauna habitat) should be retained (EPA, 2011).

Minimise clearing based on minimum necessity for development. Avoid possible infrastructure construction within designated areas which is marked as habitats for fauna of high conservation significance.

Vegetation and flora protection should be written in contracts. Identify rare and priority flora species and ensure they are protected during the mining. Establish controls on weeds, dust drainage and water management.

Utilising existing rail and port facilities as far as possible to reduce disturbance while undertaking exploration, development and mining.

Participate in the National Greenhouse Emissions Reporting System (NGERS) and any Australian Emissions Trading Scheme (API, 2011).

Conduct extensive environmental surveys and broad consultation regarding environmental issues.

Establish a sound Environmental Management Plan with clear targets, commitments, risk mitigation strategies as well as ongoing monitoring. Have an intimate knowledge of various environmental issues and get familiar with legal framework and regulations to ensure the safe and sound environment practices are carried out.

Seek comprehensive environmental insurance programs to secure the optimal insurance coverage for this project.

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West Pilbara Iron Ore Project (Aquila Resources)

3.4

Credit Risk

3.4.1 Risk Analysis In an increasingly competitive supply environment, large export iron ore producers like Aquila have been required to accept credit risk from a wider variety of international customers. Over the past two decades, export producers have become more accustomed to huge credit exposures and more relaxed about the financial standing of their customers as they vied to sell their product to both industrial sector customers and the increasing number of trading houses focused entirely on commodity speculation. For all but the most disciplined of producers, the pressure to produce volume and preserve price overpowered the ability to manage credit risk at acceptable levels. For many producers, the customer track record of payment remains the only metric used to assess the credit worthiness of a customer.

Figure 2: Increasing credit risk Source: PwC analysis From the middle of 2008, many iron ore customers began to aggressively negotiate reductions to contractually agreed prices and in some cases deferring and cancelling shipments. This is unsurprising given that a shipment of iron ore purchased when prices were at their peak could be purchased on the spot market for tens of millions of dollars less by the time the loaded freighter was in transit. Faced with increased customer reluctance to accept contracted shipments, producers quickly began to quantify their credit exposures and realised the significant risk of payment default they faced from some of their biggest customers.

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West Pilbara Iron Ore Project (Aquila Resources) 3.4.2 Mitigation Strategies

Using external credit ratings Utilising international rating agency information from Moodys and S&P is a key element of a sound credit management methodology. Investment grade ratings provide the yardstick for acceptable counterparty risk and contractual risk accepted with customers defined by rating agencies as being below investment grade should typically return a higher level of reward.

Developing internal credit ratings for customers The development of an internal credit rating system is vital for producers in the global market. Implementing such a system requires a producer to move beyond historical measures and think carefully about the factors that impact credit worthiness of their particular customer base.

Managing to limits A credit limit is defined as the total amount of outstanding debt that a producer is prepared to accept from a customer. A credit limit is one of the most important key control points in the credit management process.

Trade finance, credit insurance and banking relationships Trade finance is an important aspect of the credit management process and must be managed tightly to avoid unintended unsecured risk. The credit risk protection provided by letters of credit used to secure payment for a shipment commonly become invalid due to the inability of the producer to comply with the strict documentation requirements of the bank. In the event of payment default in such circumstances, the producer has no recourse to the issuing or confirming bank and has wasted time and money confirming the letters of credit.

Trade banks and credit insurers are excellent sources of information for iron ore producers. Banks typically have professional credit departments with deep information. It is in a banks interest to share credit related information with the producers using their services where it is legal to do so.

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West Pilbara Iron Ore Project (Aquila Resources)

3.5

Construction and Development Risk

3.5.1 Risk Analysis Cost overrun In order to comply with the West Australia State Governments Anketell Port Master plan, capital cost has increased to $7.4bn in July 2012 from $5.7bn in July 2010.

Delay Risk To compared Appendix A (Original plan) with Appendix B (Year 2012), there is no doubt that the project keeps delaying its process.

Lack of infrastructure Project must be able to connect with rail or port facilities for export purpose. However, there is no sufficient infrastructure available. Infrastructure risk has become a significant barrier for the project WPIOP and greatly reduces the economic value of the discount project.

3.5.2 Mitigation Strategies Cooperation with a third party is one of the methods to maximize the utilization of project facilities which are connected with to the port facilities at Anketell Point. Risk hedging through long-term fixed contracts. Utilizing equipment and services related to mining and rail haulage which are provided by appropriate contractors will also be a way to reduce capital expenditure. Outsourcing key packages is considered by the Capital Optimization Study team as an approach to reduce capital cost to $5.0bn from $7.4bn; however, it also increases $15.00 per dmt operating costs. Transferring the construction cost rise-and-fall risk to service providers is an additional benefit while performing outsourcing key package strategy.

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West Pilbara Iron Ore Project (Aquila Resources) 4 SWOT ANALYSIS

Strength

CSIRO compact sinter testing results demonstrated that products of West Pilbara are very compatible with certain sinter feeds (Aquila Resources, 2012). Baosteel, the worlds second largest iron producer and a major shareholder of Aquila, will continue to support the development of the West Pilbara Iron Ore project. Port is easily expandable to approximately 350Mtpa (Aquila Resources, 2012). It has secured State environmental approval for its port development plan and has settled down sale arrangements to fund the project. Geotechnical and water drilling along the rail route provide detailed information for the design of railway and bridges and ensure suitable water sources for construction.

Weakness Aquila resource suffered cash flow difficulties. No dividend was paid in 2012. As a capital intensive project, the WPIOPs total base case capital cost keeps increasing. Aquila Resource is a relatively small-sized company compared to BHP Billiton, Rio Tinto and FMG. Occurrence of disputes between joint venture parties could significantly block the whole project process.

Opportunity Rapid economic growth in emerging countries drives the higher global demand for iron ore (IBISWorld, 2012). WPIOPs Anketell port would play a significant role after the ports used by Rio Tinto and BHP Billiton ran out of capacity (API, 2011). There exists opportunities to transfer risks to a third party or other service providers as well as increase overall project returns by effective cost saving strategies. Government is willing to support this project. 20

West Pilbara Iron Ore Project (Aquila Resources) Threats Keen competitions from domestic Iron Ore companies as well as international players. High Australian dollars lead to difficult positions for exports. Iron Ore price hit a three year low, resulting in a revenue decrease. Mineral Resource Rent Tax and Carbon pricing would negatively impact the project (IBISWorld, 2012). Shortage of skilled workforce pushes up labor cost (IBISWorld, 2012). Strong bargaining power of customers. Baosteel, the major purchaser of iron ore, controls 15% of Aquila Resources. Uncertainty timing in terms of collecting all government approvals.

COMPARISON WITH OTHER PROJECTS

Projects

West Pilbara Iron Ore Mine, Rail & Port (Stage 1)

Pilbara 283 Mtpa Expansion

Roy Hill Iron Ore Mine

Investment Resources Production Railway Employees Owner/Joint Venturers Status Start-up

$7.4 billion 2.233 Bt 30 Mtpa 282 km 3,200 Australian Premium Iron Ore JV (Aquila & AMCI) Under Construction Mar 2014

$10.2 billion 17 Bt 53 Mtpa 1,400 km 6,000 Rio Tinto

$9.5 billion 2.4 Bt 55 Mtpa 344 km 5,600 Hancock Prospecting, Posco & KJTC Construction Dec 2014

Construction Dec 2013

Sources: Aquilas quartly reports (2013), Rio Tintos annual report (2012), Hancocks iron ore review( 2012).

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West Pilbara Iron Ore Project (Aquila Resources)

5.1 Pilbara iron ore project, Rio Tinto

The largest integrated mining project in Australian history. It comprises 13 mines, three shipping terminals at two ports and a rail network spanning almost 1,400km. It can currently produces 237 million tonnes of iron ore each year and is undergoing a major expansion programme to increase this to 283 million tonnes a year by 2013 and then 360 million tonnes per year in 2015. As a business, Rio Tinto doesnt just mine ore, it occupies the leading position in technology and innovation for their industry; it owns properties, pastoral stations and provides utilities and facilities to a number of towns in the Pilbara. Rio Tintos purpose-built Operations Centre in Perth is the primary control centre for their Pilbara network. It is one part of their Mine of the Future programme introducing new and improved ways of mining through automation and remote operation. Other innovations include autonomous haul trucks, trialled at their Theyst Angelas mine since 2010 and recently deployed at Yandicoogina mine. They are using technology to increase the automation of their train operations, with the first phase of the AutoHaulTM project being installed by 2014 this implementation will create the first long distance, heavy haul system of its kind in the world and will be a key enabler of their expansion programme. They are implementing remote controlled drills to enable drill-and-blast extraction of ore, tele-operated shiploading at their ports and ore sorting technology among many more projects. They have also invested more than US$500 million in cleaner and more sustainable power generation to supply electricity to their port and mine operations.

5.2 Roy Hill Iron Ore Mine, Hancock Prospecting, Posco & KJTC
Located in Pilbara, Marra Mamba iron ore deposit is a world-class and low phosphorus one, and it is the only independent iron ore project with West Australian majority ownership. The Roy Hill Project has a defined mineralisation of more than 2.4 billion tonnes of +55% Fe iron ore, enough to sustain a mine life of more than 20 years. A 344 kilometre heavy haul railway will be constructed and the Roy Hill railway will operate five ore trains per day, each consisting of three locomotives hauling 232 ore cars with a total payload of 31,450 tonnes of ore. 22

West Pilbara Iron Ore Project (Aquila Resources) Roy Hills purpose built iron ore port facility at Port Hedland will be constructed to receive, stockpile, screen and export 55Mtpa (wet) of direct shipped iron ore as lump and fines and will be designed to accommodate future expansion. Roy Hill will introduce a significant new dimension to the mining industry, with the construction of a Perth-based integrated Corporate Headquarters and Remote Operations Centre (ROC). The ROC will provide end-to-end integration of operations by managing safety, human capital and production through the adoption of state-of the-art automation. Roy Hill has embraced technology as a core element across all levels of its operations to ensure that it drives optimum operational efficiency in the delivery of 55mtpa of iron ore to world markets. Roy Hill has adopted automation as a strategic objective, with the view of industrialising the mining and logistics operations as much as possible. The companys overarching vision is that through automation, it will achieve a higher level of safety and operational efficiency, a reduced dependency on site-based personnel and greater reliability and operational efficiencies. By taking advantage of the Greenfield nature of the Project and embedding automation technology within the operational design from day one, Roy Hill will avoid the change management and retrofitting issues encountered by other organisations when introducing automation technology.

5.3 Lessons
Their initiatives will help reduce their environmental footprint and operating costs, provide greater efficiency and offer their staff more flexible working conditions and career options. Encourage employees to use innovative thinking to not only solve problems they encounter in their roles, but to also use this thinking to continually design and improve business processes and systems in all areas of the organisation.

Optimise the control of their operations while also managing risks and regulatory compliance by utilising advance technology.

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West Pilbara Iron Ore Project (Aquila Resources) 6 CONCLUSION AND RECOMMENDATIONS

The Aquila Resources Iron Ore Project is most vulnerable to financial, operating, environmental, credit and construction and development risks. Use financial derivatives like future, option and swap to lock the USD/AUD exchange rate and diversify the sources used to finance the project to reduce the refinancing risk. Market risk can be mitigated by a long-term take or pay agreement to guarantee the volume and iron ore. Derivatives like forward, swap and option can reduce the loss that otherwise would occur due to price dropping. Given intense global competition in this industry, management should pay more attention to cost control and keep stable relationships with major consumers. To avoid iron ore transportation delay and sales stuck, high skill is required in negotiating rail access agreement with leading companies and better controlling on infrastructure construction is needed to ensure the final completion. Understanding of the environmental implications. Establish a sound Environmental Management Plan with clear targets, commitments, and risk mitigation strategies. Develop a monitoring program with a clear goal of minimising clearing, educating workforce and carrying out rehabilitation. For credit sales, Aquila can use both external and internal rating to evaluate its customers creditworthiness. Manage the credit limit offered to customers can help reduce the loss on default. Furthermore, trade finance and credit insurance are another two effective tools to mitigate the credit risk. It is urgent to make decisions on what kind of cost controls can be implemented to accelerate the process of obtaining approvals and to settle the problems associated with lacking of infrastructure to mitigate the construction and development risks.

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West Pilbara Iron Ore Project (Aquila Resources) REFERENCES API (2013). West Pilbara Iron Ore Project. Retrieved from http://www.apijv.com.au/default.aspx?MenuID=4 API (2010). West Pilbara Iron Ore Project Stage 1 Mine and Rail Public Environmental Review, API Management Pty Ltd, June 2010. API (2011). Presentation at the 11th China Intl Steel & Raw Materials Conference. Retrieved from DatAnalysis Premium database. API (2011). West Pilbara Iron Ore Project Stage 1 Mine and Rail Response to Submissions Report, API Management Pty Ltd, February 2011. Aquila Resources (2012). Annual report 2012. Retrieved from http://www.aquilaresources.com.au/ Aquila Resource (Nov 2012). Annual General Meeting Presentation. Retrieved from DatAnalysis Premium database. Aquila Resources (Nov 2012).Quarterly Report December 2012. Retrieved from DatAnalysis Premium database. ASX Release (June 2010). Memorandum of Understanding Reached with China Development Bank Corporation. Retrieved from DatAnalysis Premium database. ASX Release. (December 2010). West Pilbara Iron Ore Project-Conditional Approval for Stage 1 Mine Development. Retrieved from DatAnalysis Premium database. ASX Release (July 2010).West Pilbara Iron Ore Project Definitive Feasibility Study. Retrieved from DatAnalysis Premium database. ASX Release (September, 2011). West Pilbara Funding Update. Retrieved from DatAnalysis Premium database. ASX Release. (October 2012). West Pilbara Iron Ore Project Capital and Operating Cost Revision. Retrieved from DatAnalysis Premium database. Environmental Defenders Office of Western Australia (2011). Overview of environmental law in Western Australia. Retrieved from http://www.edowa.org.au/files/factsheets/iel_introenvirolaw.pdf 25

West Pilbara Iron Ore Project (Aquila Resources) EPA (2011). Report and recommendations of the Environmental Protection Authority - West Pilbara Iron Ore Project Stage 1 Mine and Rail Proposal. Retrieved from www.epa.wa.gov.au Ernst &Young (2012). Business risks facing mining and metals 2012-2013.Retrieved from http://www.ey.com/GL/en/Industries/Mining---Metals/Business-risks-facing-mining-andmetals-2012---2013 Fielding, Z. (2013). The world at his door. AFR Smart Investor, 8(3), 44-46. Global mining outlook. (2011). China Mining Report, Q1, 1, 9-11. Global overview. (2011). India Shipping Report, Q4, 3(4), 11-41. Hart, J. (2011). Iron ore risk: a price worth paying? Banker, 161 (1025), 42-44. IBISWorld (2012) Report B0801 Iron ore mining in Australia Industry. Retrieved from IBISWorld Database. Knox, M. (2010). The deal is simple. Australia gets money, China gets Australia. Bloomberg Businessweek, 4194, 44-49. Madsen, M. (2013). Australia to see further iron ore prices fall, higher exports in 2013. Metal Bulletin, 9295, 113. Madsen, M. (2013). Rio wins appeal to keep third parties off Australian iron ore rail lines. Metal Bulletin Daily, 351, 81. Madsen, M. & Tseng, D. (2012). Iron ore derivatives wrap: OTC prices, volumes bounce higher. Metal Bulletin Daily, 342, 179. Middelbeek, E. (2012). Further tests to reduce Ferrexs Malelane iron ore capex to less than $298m. Metal Bulletin Daily, 313, 41 Power, B. (2011). Australias miners and the iron ore wall of supply. Asiamoney, 22(10), 49-54. Rio Tionto (2012). Iron ore in Western Australia in review. Retrieved from http://www.riotintoironore.com/documents/2012_in_review_FINAL(1).pdf Sanfilippo, S., Williams, T. & Gilpin, M. (2012). Pilbara and mid-west (Western Australia) iron ore case studies. Railway Technical Society of Australia: Engineers Australia. 26

West Pilbara Iron Ore Project (Aquila Resources) Steffen, A., Couchman, J. & Gillespie, B. (2008). Avoiding cost blow-outs on mining capital projects through effective project stage gating. Retrieved from http://www.pwc.com.au/industry/energy-utilities-mining/assets/Avoiding-Cost-Blow-OutsNov08.pdf Spot 63.5% Fe iron ore prices rise to $156-157 per tone cfr (2013). Metal Bulletin, 9285, 24. Tseng, D. (2012). Arrium sees first ore through Whyalla port. Metal Bulletin Daily, 344, 53. Tseng, D. (2012). Fortescue delays projects, cuts jobs. Metal Bulletin Daily, 328, 101. Western Botanical (2010), Flora and Vegetation of the Proposed Mine & Associated Infrastructure Areas West Pilbara Iron Ore Project, prepared by Western Botanical for API Management Pty Ltd, April 2010. Xu, X. (2011). Iron ore market stays put as steel prices fall again. Metal Bulletin Daily, 267, 12. Zare, M., Sereshki, F. & Aziz, N. (2008). Application of Financial Risk Analysis for Project Evaluation at a Large Coal Mine. Research Online 2008-01-01. Retrieved from http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1028&context=coal

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West Pilbara Iron Ore Project (Aquila Resources) Appendix A

Source: ASX (2010)

Appendix B

Source: Aquila Resource (2012)

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