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The China-controlled mining company looking to buy Rio Tinto’s thermal coal business in Australia has slumped to another annual loss and reported net debt of almost A$4.8bn (US$3.7bn).
In spite of a sharp rise in coal prices, Yancoal Australia on Tuesday said it had recorded a loss of A$227m in the 12 months to December. That was a slight improvement on the same period a year ago, when it racked up a loss of $292m, but net debt rose to over A$4.7bn from A$4.5bn in 2015.
The results highlight the challenge facing Yancoal as it attempts to finance the purchase of Rio’s thermal coal mines in the Hunter Valley through a $2bn equity issue. The company, which is listed in Australia, has a market capitalisation of just $250m.
“Renewed global demand buoyed by improved coal prices will continue to strengthen Yancoal’s performance, as we pursue our future growth initiatives and strategic acquisitions in the best interest of our shareholders,” said Yancoal chief executive Reinhold Schmidt in a statement.
Yancoal is 78 per cent owned by Yanzhou Coal Mining. Yanzhou is in turn owned 56 per cent by the government of Shandong Province.
The state-controlled miner has said it will sink $1bn into Yancoal’s proposed rights issue, leaving other investors to stump up the rest. One of those shareholders is Noble Group, the barely profitable commodity trader. Noble owns 13 per cent of Yancoal.
Industry observers believe Yancoal might struggle to get the cash call away. It has already moved to cut the purchase price, decided against buying the Rio assets for an upfront payment of $2.35bn. Instead, it will shell out $1.95bn upfront following by $100m a year for the next five years plus royalties.
But it still needs to persuade current and potential investors that the Rio mines will perform better under its ownership. Yancoal operates nine mines currently across Australia, employing around 2,000 people.
On top of that the outlook for coal prices is uncertain. While benchmark Australian coal more than doubled in the past year it was a direct result of a change in Chinese policy. Thermal coal is burnt in power stations to generate electricity.
Beijing imposed production curbs last year in an attempt to boost the profitability of its heavily indebted coal industry. After coal prices went into the stratosphere it relaxed the rules and the industry is now waiting to see what it does next.
Still, if Yancoal cannot raise the money it will be able to walk away from the deal without a huge financial penalty. For reasons that remain unclear, Rio set the termination fee for the deal at just $23.5m.
If the deal does fall apart it could trigger interest from Glencore, the miner and commodity trader. It has neighbouring assets in the Hunter Valley and could extract significant synergies by putting them together. Glencore boss Ivan Glasenberg has never hidden his interest in the business but he would be loathe to overpay.