For years, Rio Tinto has been rumoured to have these coal assets on the block.
Sam Walsh, the former CEO of Rio Tinto, was believed to have been locked in intense negotiations with those hard dealmakers over at Glencore for months, hoping amongst hopes to get them over the line so he could rid the company of its coal-making legacy.
Sam, more of an iron ore man, didn’t really see a future for Rio Tinto’s coal mining operations because with that plunging coal price, the margins were just not there. Anyway, his mind was more focused on cranking out extra tonnes from the company’s Pilbara iron ore operations and establishing an iron ore mine in Central Africa.
Times have now changed. Rio has a new CEO by the name of J-S Jacques and the coal price has had a meteoric run up, changing the dynamics of any deal.
A growing sense of urgency takes place, especially with M&A advisors, when commodity prices start marching up so quickly.
There is a sense that if you don’t clinch the deal now you will have to pay a lot more down the track to secure the assets as the vendor is able to drive a harder bargain.
Regular readers of Australia’s Mining Monthly would recall that Yancoal’s interest in Rio’s Hunter Valley assets was flagged back in September last year.
Intense due diligence has been taking place since that time, and the Hunter Valley coal assets, which include the Mt Thorley Warkworth mine complex and the Hunter Valley Operations, have passed muster for Yancoal, which is majority owned by the Chinese coal mining giant Yanzhou.
“Rio Tinto has conducted a comprehensive market testing and price discovery process and has held extensive discussions with several potential acquirers of the asset but Yancoal Australia provided the only offer that represented compelling value for the assets,” the company said.
The Chinese have been making strategic investments in Australian companies and assets with an eye to the long term and they are keen bidders for quality assets. Anyone who has been to a Sydney house auction with Chinese bidders could attest to that.
Yancoal sees obvious benefits with its other Australian operations, which currently include the Moolarben coal mine complex near Mudgee, which has just helped the company produce 4.51 million tonnes of saleable coal for the December quarter, up 21% on the previous corresponding period.
Established fleet and mine plan efficiencies at the Moolarben complex led to a 35% upsurge in production on the year prior due to the realisation of the benefits of the Stage 2 open cut expansion and improved yields.
The production profile at its Austar underground mine also seems to be on the mend, with production up 394% on the year prior, having sustained steady production and development rates throughout the reporting period.
Now, the Rio Tinto deal will transform Yancoal into Australia’s largest, pure-play coal producer with expected pro-forma run of mine coal production of 71Mtpa.
Yancoal expects substantial operational synergies to be realised from blending Coal & Allied’s and Yancoal’s coal products to realise a higher overall coal product price; corporate and administrative cost savings; site and infrastructure efficiencies (including optimised asset management and maintenance); and procurement costs savings arising from the expanded operations.
The transaction is subject to certain conditions precedent being satisfied, including approvals from the Australian Government, Chinese regulatory agencies and the NSW Government but Rio Tinto is obviously confident and happy that they took some M&A advice about selling at the right price.
If the deal goes through as expected, Hogsback thinks the coal mining landscape in Australia will never be the same again, with a huge Chinese player who bought in near the bottom of the market and a troubled American player Peabody Energy, who bought at the top.
