Yanzhou Coal Mining shares gain on US$2.45 billion Australian acquisition from Rio Tinto

Acquisition is considered ‘very substantial’ under Hong Kong listing rules. Stock surges as much as 3.2pc during Wednesday trading

PUBLISHED : Wednesday, 25 January, 2017, 11:44am
UPDATED : Wednesday, 25 January, 2017, 10:53pm

Shares in Yanzhou Coal Mining, the listed unit of China’s fourth largest coal miner Yankuang Group, surged as much as 3.2 per cent after it announced plans to buy coal mining assets in Australia for US$2.45 billion from global mining giant Rio Tinto.

The deal comes after the price of power station coal delivered at the port of Newcastle port in Australia almost doubled in November from June to a four-year high of US$100 a tonne after China, the world’s largest coal producer, slashed output last year.

Yancoal Australia, the Shandong province-based company’s Australia subsidiary, has agreed to buy three coal mines and related assets in the Hunter Valley region of the state of New South Wales.

The deal would see Yancoal “develop, expand and diversify its high quality and low cost coal portfolio in Australia”, Yanzhou said in a filing to Hong Kong Stock Exchange on Wednesday.

“The board also expects the acquisition to create synergies with its existing operations in Australia and further expand its coal production.”

Yancoal already has two operating mines in New South Wales.

Yanzhou shares traded as high as HK$6.04 in Hong Kong before closing 1.5 per cent higher at HK$5.94.

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Pre-tax profit for the three projects based on the equity stakes to be sold was calculated at A$440.7 million in 2016, up from A$218.6 million in 2015 and A$179.5 million in 2014, Yanzhou said.

The acquisition will add 556 million tonnes of “marketable” coal reserves on top of Yancoal’s current reserve of 274 million tonnes, and more than double its output, it added.

The acquisition will trigger rights for HVO Resources, a firm related to Japanese conglomerate Mitsubishi which has an interest in one of the joint venture coal projects, to sell its 32.4 per cent interest to Yancoal.

The transaction price will be agreed upon later at the “fair market value” of the interest.

The acquisition will add 556 million tonnes of “marketable” coal reserves on top of Yancoal’s current reserve of 274 million tonnes, and more than double its output
Yanzhou, in a filing to Hong Kong Stock Exchange

Commodities consultancy Wood Mackenzie’s analysts said in a note that Yancoal will be paying a “significant premium” for the assets so Rio Tinto will realise “full value,” allowing the latter to pay down its debt.

But it is a “transformational” deal for Yancoal, they said, propelling it to become Australia’s fourth largest coal producer with projected 2017 output of 32 million tonnes, up from 13 million tonnes in 2016.

It would also raise Yancoal’s average power station coal cash cost-calculated profit margin to US$28.5 a tonne from US$25.4, and that of metallurgical coal to US$63.7 from US$58.4, they added.

The fact that Rio has announced major resource increases in two of the three mines, which although need further work before they can be converted into reserves, would partly justify the premium to be paid, they said.

The acquisition is considered a “very substantial acquisition” under Hong Kong listing rules and requires Yanzhou shareholders’ approval.

Approval from Rio Tinto’s shareholders is also required.

Yanzhou plans to fund the acquisition with proceeds from an earlier rights share issue conducted by Yancoal Australia.

Completion, expected in the third quarter of this year, is subject to approval by Australia’s Foreign Investment Review Board, as well as approval by various mainland Chinese authorities.

If Yanzhou terminates the acquisition agreement, it needs to pay Rio a US$23.5 million termination fee, the filing said.