Bountiful niche

CUTTING the coal others found uneconomic to mine has proved a winner for a New South Wales contractor, which is boasting 118% share price growth.

Noel Dyson

It is a classic rags to riches story. A couple of American coal mine specialists came to town to show the local industry how to tackle thin coal seams only to have their machines trapped in a mine that had gotten into financial difficulties. Enter Bounty Industries managing director Mark Gray, who saw the benefits of marrying the Americans’ approach to an engineering and equipment hire business; and a sharemarket star was born.

According to a review conducted earlier by International Longwall News, Bounty came second only to Western Australian-based miner Aquila in terms of top performing coal stocks on the Australian Stock Exchange. Bounty managed share price growth of 118% to October.

The way forward has not been totally smooth though. Bounty’s first contract was to mine thin seam thermal coal at Centennial’s Ivanhoe Colliery. Centennial decided to terminate that contract about six months earlier than planned, citing lower than expected quality of coal. The early end of the Centennial contract — mining finished on December 1 — caused Bounty to issue a revised earning guidance for 2006, predicting its net operating profit after tax to be more than $5 million, down from the $6 million provided in its annual report.

However, that earnings downgrade was dependent on the workforce and equipment from Ivanhoe not being redeployed. Bounty then went to the market with news that it had signed a 3-year contract to mine thin seams at Anglo Coal’s German Creek mine and would be moving its men and machines there.

Niche player

Bounty, through its 51% owned subsidiary InCoal, is understood to be the only company offering low profile coal mining in Australia. It goes after the sort of coal seams that major mine contractors and owner-miners tended to avoid — those that are less than 2m high. This height is too low for most traditional machine mining methods to be applied economically. However, in a quirk of geology, these thin seams are usually much higher quality than other seams in the mine. In some cases they can be used to extend the life of a mine or to boost its output by being blended with lower quality coal. The company also leases equipment to mining companies as well as manufacturing and maintaining coal mining and materials handling equipment.

The company’s technique has been proven to recover a higher percentage of coal at a faster rate than conventional approaches, which helps reduce the variable cost of mining. The company also uses a continuous haulage system to replace the shuttle car system, which is estimated to increase production for a given mining unit by up to 50%.

Bounty has about 60 miners on its payroll and, Gray said, was gearing up towards adding another 30 over the next 3 months. “We are looking at having three production units. It’s about 30 men to a production unit,” he said.

Gray said he had not seen the early end of the Centennial contract as bad news for Bounty. One of the main problems with the contract was that it was mining thermal coal, which is harder than the coking coal Bounty prefers to chase. The harder the coal the more wear and tear on machinery.

Despite the coal hardness, Gray said Bounty had performed well at Centennial.

“We were averaging 100m a shift. Australian historical records show with bord and pillar mining you normally get 40-50m a shift,” he said.

The Anglo Coal work, however, should be easier on Bounty’s machines because it will be mining softer coking coal. The company will target the Aquila seam, 100m above the German Creek seam.

“Going forward we’ve made it pretty clear to the market that we only really want to be involved with coking coal unless a steaming [thermal] coal miner will pay us a high margin,” Gray said.

With the Anglo deal secured, Gray said Bounty was also in discussions with another organisation but declined to identify it. “We’re factoring that in for financial year 2007,” he said.

Gray said the Anglo deal, which had been about 18 months in the making, was also significant because it was for 3 years. “There are very few contractors that get anything beyond month to month,” he said.

Opportunity knocks

Bounty entered the thin seam mining arena by acquiring Thin Seam Mining, run by two American expatriates Larry Cook and Amon Mahon. Gray said Thin Seam had been caught up in the financial collapse of Allied Coal and had its machinery trapped in Allied’s Bellambi mine. He said retrieving that equipment had been a major undertaking. “I had to go to the New South Wales Government to get the minister to put some pressure on to get the equipment out,” Gray said.

With most of Thin Seam’s special equipment retrieved, Gray set about marrying Thin Seam’s operations to an engineering company. That combination, he said, was the key to Bounty’s success.

“If you are going to own mining equipment you need engineering ability to support the business. The key to cutting coal is having your equipment running 24-7,” Gray said.

Cook and Mahon have remained with Bounty and own 49% of InCoal.

Bounty went onto the Australian Stock Exchange through a reverse takeover of exploration company Ausmet Resources. Ausmet’s exploration interests were transferred to unlisted public company Discovery Capital.

Gray said he had been keen to take the company public. “I had backers behind me who had been funding the company for a year,” he said. “They [the backers] had been arguing to keep the company private but I thought this [going public] was the way to go.”

One of the attractions for Gray was the presence of WA businessman Howard Dawson and Peter Strachan, a man better known as a stock market analyst, on Ausmet’s board.

“Even though it was just a WA junior I could get some value from having those guys around the boardroom table,” he said.

Australia’s Mining Monthly – January edition

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