Gas man takes equity after bank's hot air


WHEN bankers become experts in gas recovery, it's probably time to turn to equity markets for your cash.
Certainly that has been the experience of Richard Cottee, managing director of Queensland Gas and one of Australia's most enthusiastic advocates of that most esoteric of resources, coal seam gas.
On Friday, Cottee confirmed long expected plans to raise $60 million in new equity to finance more rapid progress of QGC's Surat's gas-to-power plans.
The one-for-four renounceable rights issue is fully underwritten, so there is no real problem for QGC. Except that Cottee, like many of his contemporaries at the little-fish end of the resources boom, was pretty well forced to turn to his shareholders because of the caution of bankers, who figure they knew the fundamentals of Cottee's business better than he did.
Bizarrely enough, the banks would not finance QGC's expansion plans unless Cottee committing to a business plan that would have permanently restricted his ability to compete in the thriving Queensland gas market.
Under the bankers' case, Cottee needed to spend $60 million more than he wanted to, on building nearly three times as many gas wells as the project actually needed to meet Cottee's production targets.
The bank model required 98 wells production targets from QGC's Berwyndale South coal seam gas project.
But Cottee insisted that 38 wells would be more than enough, on the basis of the latest round of production testing which had, to some degree, shifted the paradigm on the gas productivity of QGC's coalfields.
Cottee needs the new cash to expedite expansion of QGC's new coal seam gasfields in the coal-rich Surat Basin. QGC already sells gas to the Swanbank and Braemar power stations from its Berwyndale South and Argyle fields but it needs to expand capacity to fulfil a 10- year deal to supply Incitec Pivot.
For all that, QGC's progress is underpinned by new contracts. There is also a good deal of carpe diem in the urgency of Cottee's push to ramp-up output. He reckons the latest delay in the proposed Papua New Guinea gas pipeline has opened to door for the new generation of Surat coal seamers currently trying to secure a slice of the growing Queensland gas market. There is now a real possibility that there will be a serious supply gap that QGC and others can fill.
There are a host of potential customers who are very nervous about the fate of the PNG project and are becoming ever more ready to listen to the coal seam gas story.
Cottee is following a fairly novel business model for a gas man. The theme to his strategy is that we are facing energy shortages for the long haul. And that means, he argues, future industrial development is likely to cluster near energy sources for supply security and lower delivery costs.
Serendipity, then, has delivered Cottee with geographic and geological opportunity to take best advantage of our times. QGC's Surat project is relatively close to Brisbane, sits on key gas pipeline and power infrastructure, and it remains a relatively low-cost development frontier.
But Cottee is not interested in the "build it and they will come" approach to expansion. He is going to shop pretty aggressively for new customers. For example, QGC could find itself committing to cut-price gas contracts in return for equity upside in the value-adding enterprise it attracts to its customer base.
As part of the drive to attract new industrial infrastructure to Cottee's corner of the state, QGC and ANZ Infrastructure will push ahead with the Condamine Power Station, which is to be built effectively on top of the Berwyndale South deposit.
Condamine will be funded by ANZ Infrastructure Services, which will transfer the asset to QGC after 20 years. But QGC will supply the gas and own the power the station produces.
IF YOU need proof that managing a global miner is not all beer and skittles, just reflect on the last 24 hours at Rio Tinto.
While London-based finance director Guy Elliott spins his way through the local investment community, his profit machine hit a pair of minor speed bumps yesterday in the form of foreshadowed legal action in Perth and long-awaited strike action in Chile.
The strike is at Escondida and, given it is operated by fellow Anglo-Australian monolith BHP Billiton, there is not too much Rio can do but cross its corporate fingers and hope the final price for a return to work is not too high.
Rio was a bit surprised, though, to find itself named as a respondent to Cazaly Resources' bid for a judicial review of the contentious Shovelanna decision by WA State Development Minister John Bowler.
Remember, Shovelanna was returned to Rio's tender care in April, after the minister rejected the midnight pegger's attempt to seize on the big miner's failure to renew its exploration licence last year.
Cazaly, understandably, reckons the minister got it all wrong. Which is fair enough.
The decision to list Rio and its Shovelanna co-owner, Gina Rinehart's Hancock Prospecting, is clearly aimed at lowering their legal comfort zones.
Cazaly has indicated it is will vigorously pursue discovery of "various relevant documents the Minister and Rio have refused to disclose". And legal discovery is a process that big companies in particular sometimes find very disturbing indeed.