Sino Construction turning itself into a global coal resource player

Seizing opportunities in the bear market, Singapore mainboard-listed Sino Construction has been aggressively acquiring coal assets and is now on the hunt for more.

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Guanyu said…
Sino Construction turning itself into a global coal resource player

Chan Yi Wen
19 November 2014

Seizing opportunities in the bear market, Singapore mainboard-listed Sino Construction has been aggressively acquiring coal assets and is now on the hunt for more.

Just this year, it has locked in three new coal deals: a bid for 100 per cent of Sydney-listed Guildford Coal, which has coal operations in Australia and Mongolia; a 52 per cent stake in Jems Exploration, an Austalian coal company; and a 51 per cent interest in Signet Coking Coal International, a South African coal player.

Andy Chee, Sino Constructions’s chairman, told BT that the company, which is principally engaged in building construction and civil engineering activities in Daqing City, is transforming itself into a global coal resource company focusing on supplying the markets of China and India.

“We are cautiously confident of building a 10 billion tonne resource company within two years, with minimal gearing or financial exposure,” said Mr Chee.

Favourable trade arrangements between China and Asean have also spurred Sino Construction to explore Indonesian coal acquisitions to supply coal to southern China, Mr Chee revealed.

Although China reinstated tariffs of 3 to 6 per cent on coal imports, which went into effect last month, this is not expected to impact Indonesian coal exports due to free trade agreements between the two countries.

Once the construction company completes the transformation into a resource player, it will change its name to Magnus Strategic Resources, to better reflect its new business.

According to Mr Chee, the company’s coal acquisitions are guided by four requirements: high grade thermal coal and coking coal; individual mine project life of at least 15 years; accessible infrastructure; and cost efficiency.

Some 70 per cent of its coal assets currently comprise coking coal, which is largely used in steel-making, with thermal coal, typically used in electricity generation, taking up the remaining 30 per cent. All three acquisitions are contingent upon shareholder approval at an extraordinary general meeting to be held next month.

Most of Sino’s coal assets are still in the prospecting phase, except for its Mongolian mine, which started production two months ago. The company’s next step is to either sell its proven coal reserves or pursue joint ventures to develop its assets.

The company’s growth prospect has caught the attention of some investors. Since 2013, self-made multi-millionare Edward Lee - who owns significant stakes in many other listed companies - has accumulated a 21 per cent stake in Sino Construction.

When contacted about his interest in Sino Construction, Mr Lee told BT that coal still remains the number one source of power. And demand will continue expanding on the back of population growth globally, he added.

“Not only are the number of people increasing, but each individual is also using more electricity on a per capita basis,” he said. “When people burn coal, the image is ash and pollution, but the alternative is expensive electricity, or darkness.”

“(And) as (the) urbanisation trend continues, demand for coking coal (for steel production) will continue to increase too.”

Mr Lee sees few coal proxies in the region, and he reckons Sino Construction’s aggressive transformation from a construction into a resource play is not just impressive, but also strategic. He noted that Mongolia and South Africa provide cost advantages, and Australia exports high quality coal.

Jim Nicholson, senior vice-president of markets data provider Argus Asia, agrees on the last point.

“To minimise risks, cost of production at mines is a key consideration for investors,” he said.

Meanwhile, the likes of Mr Chee and Mr Lee remain upbeat on the prospect for coal.
Guanyu said…
“Instead of buying bags of coal and locking them up in my bedroom, I look at companies with exposure to this industry,” Mr Lee said. “If done smartly, I win two-fold. First, the rebound in coal prices. Second, the company’s ability to execute its strategy and extract even greater value from mispricings within the industry.”

He also cited the company’s conservative use of its balance sheet, with management opting to tap bond markets, rather than take on excessive debt, as well as its asset-light approach, buying tenements and rights, and drilling to prove reserves rather than committing billions of dollars to build and run mining operations.

“Our priority is not just to achieve high profits but to achieve the highest possible internal rate of return (IRR),” summed up Mr Chee.

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