The Federal Government did everything it could to allow Chinese group Yanzhou Coal Mining to take full control of its Australian associate, Yancoal Australia (YAL) (the old Gloucester Mining).
Federal Treasurer Joe Hockey allowed the Chinese company to renege on its 2009 agreement with the Foreign Investment Review Board to sell down its stake in Yancoal to 70% by the end of 2013. It had a 78% stake.
But Yanzhou announced in July 2013 that it wanted to lift its stake to 100%, a move Mr Hockey finally announced his approval of on December 11.
The Treasurer said Yanzhou had requested that the conditions on its Yancoal investment be lifted.
"In commitments provided to me, Yanzhou has undertaken to continue to support Yancoal’s ongoing operations in Australia, thereby maintaining its position as a major regional employer," Mr Hockey said in the statement issued last December.
"So long as Yanzhou continues to own at least 51 per cent of the shares of Yancoal, Yanzhou will ensure Yancoal continues to operate so that it remains solvent.
"In addition, Yanzhou will extend its existing loans to Yancoal if required, and will support Yancoal’s plans to expand the Moolarben open cut mine."
Yesterday, Yanzhou blew that deal out of the water with a one paragraph statement issued at 2.13 pm.
"Yancoal Australia Ltd’s major shareholder, Yanzhou Coal Mining Company Limited (Yanzhou), today notified Yancoal Australia that Yanzhou no longer wishes to pursue with its indicative non-binding proposal regarding the possible privatisation of Yancoal Australia as announced on 9 July 2013."
In December, Mr Hockey has also lifted conditions requiring Yanzhou to reduce its holdings in Felix Resources to less than 50% by the end of the year, and to reduce its interest in the Syntech Resources and Premier Coal Mines to less than 70% by the end of next year. There was no comment on what happens to those commitments.
For some unexplained reason, the Chinese company won’t proceed with the mop up offer, leaving the Federal Government exposed on a sensitive foreign investment regulatory approval that overturned a previous FIRB agreement.
But some analysts speculated that the 13% shareholder, Noble Group, the Hong Kong based trading company, would not support the bid, meaning it was dead in the water.
Yanzhou had proposed offering securities valued at $151 million, based on share prices before the initial offer was made last July. The proposal was to offer 0.91 depository receipts for every Yancoal share, using Yanzhou Coal’s Hong Kong-traded shares as underlying security.
But looking at the most recent figures for Yancoal, released last month, and then recent commentary about the outlook for China’s coal industry, it’s not hard to find the motivation for the surprise withdrawal of the mop up bid.
Yancoal is a loss maker for a red ink future, with poor quality mines in NSW and Queensland, and the Chinese industry’s prospects are not much better.
Some analysts reckon the slide in demand for coal in China (and falling production) could be a reason. Chinese coal consumption rose 2.6% in 2013, a third of the rate of growth in GDP.
YAL 1Y – Fed Government gives China coal escape clause to withdraw bid
Yancoal Australia had a rough 2013. It reported operational earnings before interest, tax, depreciation and amortisation (EBITDA) of $43.7 million and an EBIT loss of $227.1 million for 2013 compared to an EBITDA of $154.1 million and EBIT loss of $37.7 million in 2012.
But for the full year, including write downs and losses, the company reported a 2013 after tax loss of $832.1 million; the loss included $226.7 million of impairment charges and $258.7 million of foreign exchange movement on the outstanding US Dollar loans. The full year result compares to a $749.4 million loss reported for the First Half of 2013.
Australian thermal coal prices are now around $US72 – $US 73 a tonne, the lowest they have been since 2009, according to Bloomberg.
So with that sort of red ink and facing a weak outlook this year, Yancoal shares have been held up above 60c by the impending Yanzhou offer.
So when that disappeared yesterday, it was no wonder Yancoal Australia shares finished down 9.4% at 58c.
That valued Yancoal at around $A576 million.
The cost of a bid for 22% would have been lower than compared to the original level of $A151 million.
Yanzhou could have offered less, but the price of its shares have fallen as well, adding to the pressure to abandon the bid.
Even at these lower levels it would have been still too expensive given the weakness of the coal sector in China, here and elsewhere in the world. That’s assuming Noble Group was amenable to the offer, which it now appears it isn’t.