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Rio Tinto sale to Yancoal resets mood for Australian coal mine deals

Wednesday, January 25, 2017 - 16:40

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Chinese-owned Yancoal's US$2.45 billion purchase of the Coal & Allied division of Rio Tinto is setting the stage for more big-ticket coal mining acquisitions in Australia, where more than US$10 billion in assets are waiting to be sold.

[SYDNEY] Chinese-owned Yancoal's US$2.45 billion purchase of the Coal & Allied division of Rio Tinto is setting the stage for more big-ticket coal mining acquisitions in Australia, where more than US$10 billion in assets are waiting to be sold.

Deals stalled last year when coal prices rocketed to nearly five-year highs and miners raised their expectations on bids for their assets, but with coal prices in retreat, deals are more likely to get done, merger and acquisition advisers said.

Asian buyers are likely to be in the forefront, they said.

"Now that coal prices are no longer going up, both buyers and sellers are taking more realistic views on valuations," said K&L Gates lawyer Robert Milbourne, who specialises in mining.

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Desperate to cut debt, Anglo American put its prized Grosvenor and Moranbah mines, which produce coking coal used in steel-making, up for sale about a year ago.

But after coking coal prices tripled, it spurned an offer worth more than US$2 billion from a team led by private equity firm Apollo Global Management.

"They decided (Moranbah and Grosvenor) were too good to sell because of the higher coking coal price...The balance sheet fixed itself," said a Sydney-based investment banker with coal expertise.

With Anglo holding on to those mines, the biggest deal pending is Australian conglomerate Wesfarmers' sale of its Curragh mine and its 40 per cent interest in the Bengalla mine, which industry sources say could fetch more than US$1.5 billion all together.

Anglo American still has other coal mines it wants to sell. Peabody Energy, Vale and possibly BHP Billiton could also look to unload thermal coal mines.

Cashed up private equity players, like Apollo, Denham-backed Pembroke Resources and EMR Capital, are hunting for assets, and as the Rio deal showed, there is still strong appetite for coal mines from Asian buyers.

Prior to Yancoal agreeing to pay up to US$2.5 billion for Rio Tinto's suite of mostly thermal coal assets in Australia's Hunter Valley, the biggest post-boom purchase was US$606 million - paid by New Hope Coal in 2015 for Rio Tinto's stake in its Bengalla mine.

Yancoal may also buy Mitsubishi Corp's 32 per cent stake in the Hunter Valley Operations sold by Rio Tinto.

"We had quite a few small transactions go through last year," said the investment banker.

"We will see some bigger ones this year. The increase in the coal price last year slowed things down."

Coking coal prices have contracted by a third to less than US$200 a tonne, while thermal coal has come back from a peak of US$100 a tonne in November to trade at US$84.

In a sign that sellers want to get deals done, Rio Tinto gave Yancoal flexibility on paying US$2.45 billion in one go, or US$1.95 billion up front followed by $500 million split in annual installments over five years.

"The structure of Rio's sale suggests they were more willing to deal," UBS mining analyst Glyn Lawcock said.

"They are prepared to say you can pay us the last $500 million over five years. That's not very common."

The price for Coal & Allied underscores China's willingness to pay up for high quality coal assets abroad as its domestic industry winds back. UBS valued the assets at US$1.8 billion, while RBC valued them at US$2.2 billion at current coal prices.

Rio held out for a strong price throughout the coal market slump over the past few years, rebuffing approaches from Glencore Plc to merge its assets with Coal & Allied in mid-2014.

After that, Glencore sought an outright acquisition that also included Rio Tinto's Kestrel and Hail Creek mines in neighbouring Queensland state. Both attempts failed.

REUTERS

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