Yanzhou bids to buy out Australian mining unit

Mainland group seeks to acquire full control of Yancoal amid weak prices for coal but the move is expected to face stiff opposition

PUBLISHED : Tuesday, 09 July, 2013, 10:56am
UPDATED : Wednesday, 10 July, 2013, 4:06am

Yanzhou Coal Mining has proposed taking its Australian unit private for about A$180 million (HK$1.26 billion), a deal that would give it more control over a key coal asset but which is expected to face stiff opposition from regulators.

The proposal for Yanzhou to buy the 22 per cent of Yancoal Australia it does not own appears to run counter to previous requirements it be run as an Australian company. It also comes at a time when sensitivity over Chinese firms buying foreign assets is high.

Yanzhou, China's third-biggest coal firm by market value, is talking to the Foreign Investment Review Board and is making the case that the deal is in Australia's national interest as many resource assets are now on the block, a source said.

"The market has fundamentally changed over the course of the last four to six months and if you look around Australia today there's an innumerable number of assets for sale," the source said.

"In that kind of environment you want to be encouraging investment in this sector as much as you can, and if someone's putting up their hand to privatise an asset that they say they are committed to developing and maximising employment, I think that is compelling."

The board approved Yanzhou's A$3.5 billion bid for coal miner Felix Resources in 2009 with strict conditions, including that it operate its mines through an Australian company, list the unit by the end of last year and reduce its ownership to less than 70 per cent by the end of this year.

Given the U-turns that the board would have to make in order to approve the deal, analysts doubt that it will proceed and that scepticism was reflected in its share price.

Shares in Yancoal closed 4.3 per cent higher at 73 Australian cents but were far off Yanzhou's offer of 91 Australian cents, a price that values Yancoal at A$905 million. Hit by a slide in coal prices, Yancoal's stock has lost about half its value since its listing in June last year.

"We would be surprised if the [board] was this forgiving and therefore if the market recognised that this deal may actually happen," said Tom Sartor, an analyst with RBS Morgans.

The board did not respond to requests for comment. A Yanzhou spokeswoman declined to comment.

China has stepped up its investments in Australia as it has elsewhere. Chinese investors last year bought Australia's biggest cotton farm Cubbie Station and Shanghai Zhongfu Group has approval to invest about A$700 million in a sugar farm project.

Australia could significantly tighten scrutiny of foreign investment in farmlands if conservative opposition parties win September elections as expected.

Chinese telecommunications equipment firm Huawei Technologies has also been barred from a A$38 billion project due to cybersecurity concerns.

But law firm Clayton Utz estimates that completed Chinese investments in Australian energy and resources probably add up to "considerably less" than 10 per cent of the total value of such projects. Yanzhou's A$3.5 billion purchase of Felix represents China's biggest coal investment in Australia to date.

For Yanzhou, potentially gaining complete control of Yancoal at a time when coal prices have weakened considerably is an opportunity too good to miss.