YANCOAL’S $3.2 billion purchase of Rio Tinto’s Hunter coal assets is both a Chinese government endorsement of the NSW thermal coal export industry and a reflection of China’s “going global” mandate while its domestic coal industry contracts, says analyst Tim Buckley.
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Yancoal has made an “opportunistic move” into the Hunter on the back of Rio Tinto’s effective exit from thermal coal across the globe, said Mr Buckley, a former Citigroup analyst and Australasia director of energy finance studies for the Institute for Energy Economics and Financial Analysis.
“Obviously some read the transaction as a Chinese Government endorsement of the NSW thermal coal export industry, which in part it is,” he said.
“But Yancoal’s track record on acquisitions this decade is less than stellar. I think it is more of an opportunistic move for a company in a domestic Chinese industry that is contracting, to look offshore for growth, facilitating the global industry rationalisation in the process.
“China’s central government has given a clear mandate to the strategy of ‘going global’, and this transaction is another set in that process.”
Mr Buckley said the sale of Rio Tinto’s Coal & Allied assets in the Hunter, including stakes in Mount Thorley Warkworth mines, Hunter Valley Operations mine and its Port Waratah Coal Services interests, was an indication Rio had learnt lessons of stranded asset risk after a costly Mozambique mine sale.
Mr Buckley said Yancoal’s Hunter purchase could be seen in the context of other Chinese state-owned enterprise energy purchases in 2015/16 beyond coal, which showed them “taking global leadership of the energy markets, be that coal, coal-fired power, nuclear, hydro, renewables and grid infrastructure”.
Rio Tinto significantly increased its estimate of coal reserves at Mount Thorley and Warkworth mines in a report to the Australian Stock Exchange on Tuesday as it announced the Yancoal sale.
Mount Thorley coal reserves have increased by 208 million tonnes, from 114 million to 322 million tonnes. Warkworth coal reserves have increased by 353 million tonnes, from 613 million tonnes as reported in 2015 to 966 million tonnes.
”This increase in mineral resources reflects a continuation of work on Rio Tinto Coal Australia deposits previously announced on 28 November, 2014 and 3 March, 2016,” Rio Tinto said in a statement to the Australian Stock Exchange.
“The updates are based on a rigorous examination of leases that included a reinterpretation of the geological model, employment of new datasets and adopting improved mineral resource estimation methods.”
In a statement Yancoal said Rio Tinto would continue to operate the Coal & Allied assets until the transaction is completed, which is expected later this year.
“As such, there is no immediate change to the day-to-day,” Yancoal said.
Yancoal chief executive officer Reinhold Schmidt said the Rio purchase represented a significant expansion of Yancoal’s operational portfolio, “providing Yancoal shareholders with exposure to world class thermal and semi-soft coking coal mines”.
“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 the Australian resources sector,” Mr Schmidt said.
“Post transaction, Yancoal will be the largest pure-play coal producer in Australia, with the ability to realise ongoing value from its combined low operating cost portfolio.”
A company spokesman denied reports that part of the sale deal is the redundancy of existing workers and establishment of a new workforce under new work agreements and conditions.
The reports were “totally incorrect”, the spokesman said.
“Coal & Allied employees will come across to Yancoal as part of the transaction on current conditions and with recognition of their historic service,” he said.
Bulga Milbrodale Progress Association spokesman John Krey said the simultaneous announcement of a significant expansion of known coal reserves at Mount Thorley and Warkworth was “an interesting development” after controversial recent expansion approvals at both mines.
“We’re hoping a new player in this part of the world might consider underground mining to access those reserves,” Mr Krey said.
Warkworth’s expansion of its open cut mine required mining through Wallaby Scrub Road. But Singleton Shire Council’s rejection of the road closure, which returns to council in February, is an obstacle to those plans that cannot easily be overcome, he said.
“My thesis is that maybe they are considering underground, which we would not object to, because Singleton Council has made it clear it will not agree to the road closure so they can have an open cut mine, regardless of the expansion approval,” Mr Krey said.
“Rio Tinto had a very entrenched attitude that it would not consider underground. This is not only a change of company, but hopefully we’ll see a change in attitude.”
Rio Tinto’s second offer to Singleton Council to secure the Wallaby Scrub Road closure will be considered by the council on February 20.
