Yancoal: Transformative acquisition

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 03 Apr 2017   Posted by admin


By Reuben Adams


YANCOAL Australia will become one of Australia’s largest pure-play coal producers if its $US2.45 billion purchase of Rio Tinto’s Coal & Allied goes forward.


78 per cent-owned by Chinese State-owned Yanzhou Coal Mining Co, Yancoal Australia currently produces thermal and metallurgical coal each year for export, operating four sites and managing five others across NSW, Queensland and WA.

After a healthy 2012, when it posted profits of $404.6m, Yancoal has struggled along with the rest of its coal industry peers – posting annual losses of $832m (2013), $353.5m (2014), $291.2m (2015), and most recently $227.1m (2016).

Yet there could be light at the end of the tunnel; Yancoal is looking to snap its losing streak on the back of a healthier coal price and the Coal & Allied acquisition.


Coal & Allied

 

In February, Yancoal entered into a binding agreement to acquire all shares in Coal & Allied from wholly-owned subsidiaries of Rio Tinto for $US2.45 billion in completion and deferred cash payments, plus a coal price linked royalty.

Rio Tinto stated that it had held extensive discussions with several potential acquirers but Yancoal provided the only offer that represented “compelling value” for the assets.

Coal & Allied, the holding company for Rio Tinto’s thermal coal business, owns and operates multiple, multi-seam open cut mines in the Hunter Valley region of NSW.

It has a 67.6 per cent interest in the Hunter Valley Operations (HVO) mine, an 80 per cent interest in the Mount Thorley mine, a 55.6 per cent interest in the Warkworth mine, a 36.5 per cent interest in Port Waratah Coal Services (which owns a coal export terminal located at the Port of Newcastle) and other undeveloped coal assets, including various landholdings.

The HVO and Mount Thorley Warkworth (MTW) mines together produced 25.9mt of saleable thermal and semi-soft coking coal in 2016 (17.1mt Rio Tinto share).

The net assets subject to this sale agreement had earnings before tax of $102 million in the year to 31 December 2015, and a gross asset value attributable to them of $1.895 billion as at 30 June 2016.

If all goes to plan the transaction was expected to be complete in Q3 of 2017.

Parent company Yanzhou intended to subscribe for about $US1 billion in the entitlement offer, and Yancoal was also in discussions with professional underwriters and third-party investors to underwrite the balance of the capital raising.

Yancoal chairman Xiyong Li said the deal would be a transformative and exciting acquisition for Yancoal shareholders and form the basis for the company’s future growth and success as Australia’s largest pure-play coal company.

“Via the acquisition of Coal & Allied’s high quality asset portfolio, we will be delivering substantial cash flows to the company, quality coal products and long-term relationships with end-users in key global markets,” he said.

“The substantial cash flows from Coal & Allied’s assets, combined with the anticipated synergies and proposed equity raising will materially strengthen Yancoal’s balance sheet.

“The new Yancoal will be very well positioned to realise significant value for our shareholders in the years ahead.”

Yancoal chief executive Reinhold Schmidt said that in addition to recapitalising the company, the transaction represented a significant expansion of Yancoal’s operational portfolio at an attractive point in the coal price cycle.

“Yancoal has successfully restructured its operations and reduced costs throughout the past three years and established itself as a leading coal producer committed to investing in Australia, with the ability to realise ongoing value from its combined low operating cost portfolio.”

On completion, Yancoal will have majority ownership of three world class thermal coal assets being Moolarben, HVO and MTW; JORC marketable coal reserves of 830mt (attributable basis); ROM coal production of 71mtpa (managed) and 47mtpa (attributable basis) expected in 2017; and saleable coal production of 53mtpa (managed) and 34mtpa (attributable basis) expected in 2017.

It will also give Yancoal a stronger position on the global seaborne thermal coal margin curve, and greater diversity in thermal and coking coal products which can be readily blended and tailored to customer requirements in order to achieve optimal pricing for Yancoal.

 

Moolarben Complex Stage Two

 

The world class Moolarben mining complex within the Western Coalfields of NSW comprises an existing open cut mine (Stage One) producing export quality thermal coal and an underground thermal coal development project (Stage Two).

On 3 September and 14 September 2015 the NSW Department of Industry, Resources and Energy granted the mining lease and mining operations plan, respectively, for the Moolarben Stage Two Project.

Once fully developed, the integrated Moolarben Coal Complex (Stage One and Stage Two) would produce up to 21mtpa of ROM coal for 24 years. Stage 2 included one open cut (OC4) and two underground mines (UG1 and UG2) and some additional infrastructure which would operate in conjunction with, and utilise, the approved Stage 1 infrastructure.

In its full year Financial results, released 28 February, Yancoal announced that development coal from the Moolarben Stage Two underground mine had commenced on schedule.

Mr Schmidt said throughout 2016 Yancoal has proactively strengthened its balance sheet, reduced operational costs, maximised blending, and moved forward with Moolarben Stage Two to benefit from significant global coal market price improvements and increasing customer demand.

“We have demonstrated our capacity and resilience within a challenging market via strong and decisive action to deliver the tier one Moolarben Complex’s Stage Two underground mine on time and budget,” he said.

In 2016, Moolarben production was up 35 per cent on the year prior due to the realisation of the benefits of the Stage Two open cut 4 expansion and improved yields.

 

Outlook

 

Yancoal correctly predicted that coal prices would fall from their late 2016 highs in 2017, with China currently refusing to impose the same restrictions on its domestic coal mines provided coal prices remained in a reasonable range.

“Operationally, Yancoal will continue to maximise blending arrangements, operational efficiencies and cost saving strategies implemented throughout the year prior to support new market opportunities and production rate improvements, “ the company said in its Annual Report.

“Yancoal continues to progress the Moolarben Stage Two underground and open cut mines in accordance with project and production schedules.”

2017 guidance for saleable production is between 12mt and 12.5mt (equity share), excluding production from the Middlemount joint venture and the Watagan assets. Guidance for saleable production is also exclusive of potential Coal & Allied asset tonnes. Forecast for 2017 capital expenditure is an estimated $244 million (equity share).

 “In the year ahead, we will continue to progress the development of our open cut operations, while pursuing new marketing and blending opportunities to maximise yields,” Mr Schmidt said.

“Renewed global demand buoyed by improved coal prices will continue to strengthen Yancoal’s performance, as we pursue our future growth initiatives and strategic acquisitions in the best interests of our shareholders.”