Shenhua eyes bid for US$3.2b coal assets in Australia

Mainland firm lines up with two Indian rivals as potential buyers of slice of Rio Tinto holding

PUBLISHED : Tuesday, 11 June, 2013, 10:03am
UPDATED : Wednesday, 12 June, 2013, 3:05am

The state-owned mainland company Shenhua and India's Aditya Birla are among companies considering bids for some of Rio Tinto's Australian coal assets, valued at an estimated US$3.2 billion, people familiar with the matter said.

Rio Tinto, led by new chief executive Sam Walsh, is offloading a string of assets to help cut its US$26 billion of debt and protect its single-A credit rating.

It is also looking to cut its exposure to the coal industry, which has been squeezed by surging costs and sharp falls in coal prices. This has given potential suitors the opportunity to bulk up on good quality coal assets and secure supply agreements.

Rio Tinto is selling a 29 per cent stake in its Coal & Allied business and its majority stake in the Clermont mine in Queensland State, with preliminary bids due this week, a person with direct knowledge said.

The state-run miner Coal India is also expected to bid, the source said.

Shenhua has shown interest in buying coal mines in Australia and was among the suitors for Whitehaven Coal, a deal that failed to materialise after parties could not agree to terms, sources said.

Michael Parker, a Hong Kong-based senior analyst at the American brokerage Sanford C. Bernstein, said he believed Shenhua would not bid aggressively for the assets, unless they were offered at "fire sale prices", if only economic factors were being considered.

"The only reason for Chinese coal miners to buy Australian coal assets now is if they are taking a long-term view of building security energy reserve," he said.

With coal prices having fallen 30 per cent since November 2011 on the mainland, coal miners have suffered sharp profit declines amid rising operating and environmental protection costs.

"The structure of the industry has changed," Parker wrote in a research note last month. "There is more coal production capacity than demand; transportation bottlenecks are being resolved; the government is putting policies in place not just to reduce coal imports but to reduce coal consumption overall."

Given the transport distance and high labour costs in Australia, and improving logistics infrastructure and oversupply on the mainland, Parker said, Australian coal was less competitive relative to mainland coal compared with a few years earlier.

Meanwhile, India's huge appetite for coal is driving the bids by Indian firms.

While India boasts the world's fifth-largest reserves of coal, it still suffers power cuts because of supply bottlenecks and the poor quality of coal delivered to power plants.