When Yanzhou Coal put together its bid for Rio Tinto’s Australian coal assets in 2016, it code-named the project “Monkey King” in honour of the hero of China’s classic novel Journey to the West. It was an apt title for a deal struck just days before the end of the Year of the Monkey (in late January).
Frequent international M&A deals have made Yanzhou Coal – to again reference the Chinese zodiac – a true ‘fire monkey’: ambitious and adventurous. It is also something of a rare beast where Australian dealmaking is concerned.
In an age when global politics is getting increasingly tribal, Chinese entities have found it more difficult to secure FIRB (Foreign Investment Review Board) approval. Yet in mid-April, Yanzhou Coal added to its Australian M&A tally after receiving the all-clear to proceed with its $2.35 billion purchase of Rio Tinto’s Coal & Allied. The deal, which is being conducted through its Australian-listed arm, Yancoal, is expected to close during the second half of the year.
As the Economic Observer points out, Yanzhou Coal’s success stands in sharp contrast to the recent failure of a number of sizeable Chinese takeovers blocked by the FIRB. These include State Grid Corp’s proposed acquisition of Australia’s biggest electricity grid, Ausgrid, and food conglomerate Dakang Group’s offer for the country’s largest beef producer, Kidman, both in 2016.
Characteristically, social media users in both countries have different takes on the situation. In Australia’s Hunter Valley, where Rio Tinto’s coal assets are based, one Newcastle Herald reader said, “What a sad day for Australia. A foreign nation is now the biggest benefactor of our resources.”
Back in China the most popular reader comment under a Sina Finance story on the deal was unimpressed for other reasons: “The government has tried to reduce the overcapacity in coal and thousands of miners lost their jobs. But now we pay a foreigner to get coal and provide jobs to foreigners. It is too stupid.”
As a result of the deal, Yanzhou Coal holds three of the top four M&A spots in the China-Australia league tables, according to Dealogic data. Only State Grid Corp’s $2.89 billion 2014 acquisition of Singapore Power’s utility assets in Australia proved larger (excluding debt).
The Economic Observer says Yanzhou Coal’s overseas buying spree has been driven by two factors. Firstly, the Chinese government is keen to secure resources in the knowledge that China’s own coal reserves are running down. Tellingly, Yanzhou Coal Chairman Li Xiyong recently said that more than half of the coal mines in Shandong, where Yanzhou Coal is based, will be exhausted within the next decade.
Secondly, other Chinese provincial governments have frequently blocked its M&A moves at home where it does not have the same clout as the central government-owned Shenhua Group. Yanzhou Coal’s ultimate parent is the Yankuang Group, a state firm controlled by Shandong’s provincial government.
Yanzhou Coal has been expanding internationally since 2004. In 2009, it purchased Felix Resources for $2.79 billion (the second largest China-Australia deal on record) followed by Gloucester Coal in 2011 for $2.47 billion (the third largest). Their merger into Yancoal created Australia’s largest listed coal producer. The addition of Coal & Allied will make Yancoal the largest producer overall (it has 274 million tonnes of reserves to Coal & Allied’s 556 million).
Yanzhou Coal still needs to finance the deal, which analysts say was struck at a reasonable 6.9 times 2016 operating earnings (compared to a coal industry average of 12 times). It plans to pay up front in cash – though if it opts to stagger payments over five years it will pay $100 million more. It has announced a $2.5 billion rights offering in Hong Kong, which Yanzhou Coal will subscribe to by raising Rmb7 billion via an A-share placement.
Over the past year, the group’s China and Hong Kong-listed shares have been buoyant (up 50% in Hong Kong) as coal prices rebounded in line with government-led capacity cuts. Analysts believe prices will stay above the government’s preferred band of Rmb500 to Rmb575 price per tonne (it was Rmb618 per tonne in the first quarter). Beijing wants coal producers in the black so they can use the additional profits to deleverage.
And Yanzhou Coal is now producing profits. HSBC forecasts net income will increase by 2,584% in 2017 and 1,239% in 2018; a case of the old economy strikes back.
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