In a case that will end up on the desk of Kevin Rudd, Australia’s freshly recycled Prime Minister, China’s Yanzhou Coal has demonstrated that it not only owns the coal, it also owns the gold – in the form of cash it is prepared to spend if it gets its way.

And what Yanzhou wants is the right to bend the terms of an agreement struck with various Australian government agencies, including the Foreign Investment Review Board, which allowed it to become one of Australia’s biggest coal miners through its local subsidiary, Yancoal Australia.

In a deal that combines Chinese inscrutability with western world financial engineering, Yanzhou, wants to unravel transactions dating back to 2009. That was when coal prices were much higher than today, and promises had to be made to win FIRB approval before Yanzhou was allowed to acquire both Felix and Gloucester Coal.

As part of the process in creating a local business called Yancoal Australia, the Chinese parent company promised to retain a listing on the Australian Securities Exchange. It also promised to retain an Australian head office, and created a hybrid security called Contingent Value Rights that provided a form of insurance for the shareholders of Gloucester should the Yancoal share price fall sharply.

No prize for guessing that Yancoal’s shares have fallen as the coal price has tumbled, a situation that is causing senior management at Yanzhou a few sleepless nights because the exercise date on the CVRs is approaching and they could cost a small fortune to buy back.

In a truly perverse example of how financial markets work, the price of Yancoal’s conventional shares have been driven down by smart speculators who got wind of the terms underpinning the CVRs. Those terms essentially require Yanzhou to buy the CVRs back (in cash or shares) by the end of 2013 with the buy-back price rising as Yancoal shares fall.

According to some estimates the potential pay-out facing Yanzhou is in the order of $260 million which it can make in cash. That would be painful given the state of the coal market.

Alternatively, that payout can be in Yancoal shares – which would have to come from Yanzhou’s stake in the Australian business and not by Yancoal simply issuing more shares.

So, the problem for Yanzhou is to cough up a pile of cash in order to finalise a deal struck in better times, or cough up a portion of its Yancoal shares and risk being watered down from a dominant position of 78% in the Australian-listed company to about 40%.

Yanzhou, naturally, does not like either option. Instead it turned again to the financial engineers to construct a way of working around the problem. This started with a mopping up takeover bid that involved swapping Yancoal shares for Yanzhou depositary receipts, which will be listed on the ASX.

It is tricky, but probably complies with the terms of the original deal in that a stock exchange listing will be maintained, albeit via a locally quoted stake in Hong Kong-listed Yanzhou. It also avoids the need for a damaging cash payout, or a severe watering down of Yanzhou’s position in Yancoal.

Getting the deal over the line will not be easy. Australian investors do not like depositary receipts in foreign companies, viewing them as a secondary form of security. The Australian government also might not like the change.

It is for those reasons that Yanzhou is playing its golden card in the form of a promise to invest more capital in Yancoal’s mines in the hope that any objections raised by the FIRB over the variations to the ASX listing arrangement will be overlooked.

Described by some observers as a “cash carrot” Yanzhou will be able to say that additional capital is just what Australian coal needs today, especially as so much is being withdrawn in the form of pit closures and cancelled development plans.

Yanzhou also will argue that greater control of the Yancoal assets will improve mine efficiency and productivity.

If all this sounds confusing that is because it is. However, it also is an example of what happens when underlying conditions in an industry change – which they have done for coal – and how a financial deal struck in good times can become unworkable in bad times.

FIRB, if it is so inclined, probably has the power to stop the Yanzhou mopping up takeover of Yancoal.

Yanzhou, if it is so inclined, has the power to withdraw capital from its Australian subsidiary with a damaging loss of jobs and export income from coal production.

It is not quite a stand-off, but it could become one, and that is why common sense will prevail. Yanzhou will get its way and Yancoal will disappear after a short and inglorious time as an ASX-listed company.