The two companies today announced a merger through a $A545 million off-market scrip takeover offer by Gloucester for all shares in Whitehaven.

The proposed new company, with a market capitalisation of $900 million, is subject to 80% Whitehaven shareholder approval and clearance by the Foreign Investment Review Board due to the 20% foreign ownership of Gloucester.

While offering coal blending, operational and infrastructure synergies, today’s planned deal provides more concrete backing for the companies’ expansion plans.

“Combining these [Whitehaven and Gloucester’s] two balance sheets it is a very good defensive thing to do, but it is also very good for future growth opportunities and acquisitions should they come along,” Whitehaven managing director Tony Haggarty said in a conference call this morning.

Gloucester’s strengths lie in its cash flow from open cut operations in the Gloucester Basin, while Whitehaven has small open cut mines in the Gunnedah Basin, but its trump card lies in the potentially massive Narrabri underground project.

Stage 1 of the Narrabri project – a bord and pillar mine – is already in full-swing with planned capital expenditure of $186 million.

Haggarty said capital expenditure for Stage 2 of the project, where the mine will be transformed into a longwall operation, will be revealed in the company’s half-yearly report.

Narrabri is not Whitehaven’s only development project – the company recently built the Rocglen and Sunnyside operations.

While the capex has already been spent on the projects, the mines are waiting on delivery of about $30-40 million in mining equipment.

Whitehaven also plan to spend $10-15 million on a washery upgrade in the next 12 months.

For the next 1-2 years Gloucester plans to keep working at the $33 million Stratford upgrade program, which the company is half-way through.

The stockpile and coal handling plant upgrade will increase capacity by 40-50%.

A merged company will hold 640 million tonnes in underground resources and 282Mt in open cut resources.

The majority of underground resources (540Mt) will be bought to the table by Whitehaven.

Production of the merged company currently sits at 4.5Mt (3/4 thermal, ¼ PCI/coking coal), putting it sixth on a table of listed Australian pure coal producers.

The breakdown of thermal to coking coal is expected to tip further in favour of thermal coal when Narrabri comes onto line.

In market cap terms, a merged company would sit fourth in a line-up of its Australian coal peers, below Coal & Allied, New Hope Corporation and Felix Resources.

Gloucester managing director Rob Lord said although a combined entity would not have huge output initially, “the capability in our pipeline means we have potential to be a big producer”

“We will optimise production of our current operations in both Gloucester and Gunnedah,” Lord said.

“We will develop our big projects – Narrabri and our open cut projects in an efficient and timely way. With the balance sheet of the combined company it is even more deliverable.”

Haggarty said the merger would also give the companies broader access to infrastructure through Whitehaven’s membership of the Newcastle Coal Infrastructure Group (NCIG) and Gloucester’s access to the Port Waratah Coal Services facilities at Newcastle.

“There are clear benefits in optimising margins,” Lord said.

In response to questioning by analysts on the discounted appearance of the deal where Gloucester shareholders would be receiving about a 20% premium, Haggarty said the price was based on share performance over the past 12 months.

He said the offer may look like a discount based on current prices, but the deal could be regarded as a premium on prices 3-12 months ago.

“In the current climate we are in we think that this is a very good thing,” Haggarty said.

He said major Whitehaven shareholder AMCI was to consider the deal, but AMCI president and Whitehaven non-executive director Hans Mende had already indicated his support.

Lord said Gloucester would be contacting major shareholders today, including Hong Kong-based commodities trader Noble Group.