Mergers & Acquisitions

Mergers & Acquisitions

Yanzhou Coal snatches Rio Tinto Australia from Glencore in US$2.69 billion takeover battle

The Coal and Allied acquisition will add 556m tonnes of ‘marketable’ coal reserves on top of Yancoal’s current reserve of 274m tonnes, and more than double its output

PUBLISHED : Tuesday, 27 June, 2017, 12:43pm
UPDATED : Tuesday, 27 June, 2017, 11:02pm

Yanzhou Coal Mining, the listed flagship of China’s fourth largest coal miner Yankuang Group, has won a takeover battle after sweetening its offer at the eleventh hour for Australia coal assets being sold by mining giant Rio Tinto.

Rio Tinto confirmed that Yanzhou unit, Yancoal Australia, to be the preferred buyer of its power-station coal mining unit Coal & Allied Industries, citing a “high level of completion certainty, a further improved offer of US$2.69 billion, with all regulatory approvals received or waived”, in a statement on Tuesday.

Natural resource commodities producer and trader Glencore had also been in the running for the assets, but Rio Tinto said Yancoal’s offer contains a faster completion timetable expected in this year’s third quarter, “whereas any transaction with Glencore is unlikely to complete until the first half of 2018 at the earliest”.

In addition, Rio said Glencore’s offer of certain cash flows to Rio carries uncertainty and that the Yancoal offer “presents greater net present value”. [Net present value refers to how much a project is valued based on its projected future revenues and outlays.]

Shandong province-based Yanzhou tabled its US$2.45 billion bid for Coal and Allied in January. The company owns coal mines and related assets in the Hunter Valley region of the state of New South Wales, where Yanzhou also owns some coal mines.

Glencore trumped that offer last Friday offering US$2.68 billion, which it said would lapse if Rio does not declare it be superior by the early hours of Tuesday Asia Pacific time.

Yanzhou reacted by announcing on Tuesday morning would add a royalty payment of US$240 million over five years, of which US$200 million will be paid by the end of next year, raising its bid to US$2.69 billion.

Yanzhou said its state-owned parent Yankuang has underwritten the deal, underlining the Chinese government’s support of the overseas acquisition, despite the recent introduction of more restrictions and greater scrutiny placed on overseas asset purchases to stem capital outflows amid the yuan’s depreciation since the second half of last year.

The Coal and Allied 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.

Canada-based RBC Capital Market estimated in a research note on Monday that for Yanzhou, the “potential synergies”, via cost savings or additional value added, from the acquisition at over US$500 million.

“The competition for the Coal & Allied assets may be an indicator of the improving health of mining companies across the board, and may represent a shift in philosophy where companies are willing to seek merger and acquisition options for growth,” it said. “This would be positive for producers with high quality assets.”

The Yanzhou deal comes after the price of power-station coal delivered at the port of Newcastle 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. It has since eased back to around US$80.

Yanzhou shares closed 0.3 per cent higher at HK$6.63, after rising as much as 1.5 per cent. The Hang Seng Index edged down 0.1 per cent.