As part of its strategy to advance the Cooroorah and Hillalong coal projects, Bowen Coking Coal (ASX: BCB) has announced plans to sell Comet Ridge to Springsure Creek Coal Pty Ltd in a deal that ultimately values the project at A$3 million via a royalty buy-out clause.
Under the initial purchase terms, Springsure Creek Coal will pay Bowen Coking Coal A$100,000 in cash.
Bowen Coking Coal will retain a free-on-rail 1.25% royalty on the first 2.8 million tonnes of coal produced from the project. However, the agreement allows Springsure Creek Coal to purchase this royalty for A$3 million.
Speaking with Small Caps, Bowen Coking Coal’s corporate and business development manager Blair Sergeant said Bowen Coking Coal was “clearly focussed on both the Hillalong and Cooroorah coking coal projects, which were recently boosted with the company’s acquisition of Hillalong East from Rio Tinto and Cape Coal.
“This focus has been reinforced by the agreement to dispose of Comet Ridge to a group that is best placed to develop the asset in the nearer-term, which is more likely to deliver cash to Bowen Coking Coal in the form of the agreed royalty stream,” Mr Sergeant said.
According to Bowen Coking Coal, there are “obvious synergies” between Springsure Creek’s namesake project and Comet Ridge.
As part of the strategy, Bowen Coking Coal’s royalty ensures it retains exposure to any potential income from Comet Ridge without providing capital for its development, which would also include developing rail infrastructure.
“Although it’s difficult to predict and quantify what the royalty may deliver to Bowen Coking Coal, the fact the agreement allows the acquirer to ‘pay out’ the royalty by making a A$3 million cash payment to Bowen Coking Coal does provide some indication,” Mr Sergeant noted.
“Although not a huge number, it is significant in relation to Bowen Coking Coal’s current enterprise value of A$5 million – the balance of Bowen Coking Coal’s portfolio, therefore, represents enormous upside,” he added.
The divestment has also been structured to “incentivise” Springsure Creek into fast-tracking Comet Ridge, while enabling Bowen Coking Coal to maintain a “low risk” exposure to the project’s future cash flows.
Under the transaction terms, Springsure Creek has four years from the date of receiving all necessary regulatory approvals to develop the mine.
The agreement allows for Springsure Creek to buy out Bowen Coking Coal’s 1.25% royalty for A$3 million in cash within that four-year period.
If Springsure Creek fails to reach the four-year milestone and doesn’t purchase the royalty, then Bowen Coking Coal can elect to buy back the project for what Springsure Creek has spent on development during that time.
Should Bowen Coking Coal proceed with a buy back, then Springsure Creek will grant Bowen Coking Coal access to its rail infrastructure and provide capacity for Bowen Coking Coal to rail up to 350,000 tonnes per annum of coal.
Cooroorah and Hillalong projects
Funds from the sale of Comet Ridge will be redirected into advancing the Cooroorah and Hillalong coking coal projects, which includes the recent Hillalong East purchase.
Hillalong East adjoins Bowen Coking Coal’s Hillalong project in Queensland’s Bowen Basin. The projects are close to the Hail Creek mine and requisite infrastructure.
Rio Tinto’s exploration at Hillalong East found the same coal seams as those within the Moranbah and Rangal Coal Measures.
However, the Hillalong East coal seams are closer to surface and extend more than 370m at depth.
With the Comet Ridge divestment, Bowen Coking Coal has calculated resources across its assets of 159 million tonnes with Cooroorah contributing the vast majority of that at 154Mt coking coal.
At this stage, Cooroorah is Bowen Coking Coal’s most advanced asset and is in proximity to Wesfarmers’ Curragh mine.
Commenting on the Comet Ridge sale, Bowen Coking Coal managing director Gerhard Redelinghuys said the company viewed the transaction as the most efficient way to monetise value from the project.
“Maximising the synergies between Comet Ridge and Springsure Creek is likely to improve the overall viability of the project and subsequent potential for medium-term cash flow to Bowen Coking Coal,” Mr Redelinghuys said.
He added generating cash flow would be a “huge milestone” for a small resource company.
Investors reacted positively to today’s news with Bowen Coking Coal’s share price soaring more than 7% to reach A$0.015 at midday.