Chinese firms want to buy coal assets overseas, but on the cheap
MELBOURNE (Reuters) - Chinese companies are on the hunt to buy overseas coal mines as Beijing's switch to cleaner fuels stokes demand for higher-quality coal produced in countries such as Australia, according to people familiar with the firms' strategies.
A renewed appetite for acquisitions by the world's biggest coal consumer will be a big boost for miners who are trying to dispose of assets worth billions of dollars to boost shareholder returns.
These include Rio Tinto , which has put Australian and Mozambique coal operations on the block, and Linc Energy , which is selling its New Emerald Coal business.
The Chinese, however, are not rushing to buy. They see asset values coming under further pressure as coal prices remain depressed amid a supply glut that has already driven prices down about a third since 2011.
"We have clients who are interested in taking stakes in coal assets. But the view is the market's not going to get any better for two years. So why buy something today when it's going to be a lot cheaper in eight months' time," said Sam Farrands, a Hong Kong-based partner at law firm Minter Ellison.
Plans to curb air pollution have raised the prospect of a long-term decline in China's need for thermal coal, with Beijing aiming to reduce coal's share of the energy mix to 65 percent or less by 2017 from 73 percent this year.
The lower share, though, will be within an expanding base and it will take a long time to wean China away from coal as it is the cheapest source of fuel for power.
As part of cleaner energy policies announced this week, China will push the use of better quality coal.
This will lead to a split in coal markets, with high-energy coal set to attract a greater premium, which could favour better quality Australian coal, said Michael Elliott, global head of mining and metals at Ernst & Young.
China's thermal coal imports are forecast to rise 17 percent over five years to 281 million tonnes, and metallurgical coal imports by 23 percent to 107 million tonnes in 2018, according to Australia's Bureau of Resources and Energy Economics.
"I don't think (coal use) is going to fall off a cliff. It's not possible yet," said Ken Su, China metals and mining leader at consultants PwC in Beijing.
MONGOLIA OFF-LIMITS
Chinese firms hunting for buys include state-owned enterprises, miners, power firms and traders, targeting thermal coal for power stations and coking coal for steel mills, legal and financial advisers in China and Australia said.
Though they declined to name their clients, state-owned Shenhua Group Corp Ltd has looked at assets in Australia, including Whitehaven Coal and Rio Tinto's stakes in the Clermont Coal mine and Coal & Allied.
Yanzhou Coal Mining Co <600188 .ss=""> has already set the ball rolling, seeking to buy out its Australian unit Yancoal Australia , following a one-third slide in Yancoal's share price this year. The deal, announced in July, still needs Australian government approval.
Aluminum Corp of China (Chalco) <601600 .ss=""> <2600 .hk=""> has long eyed coal assets in Mongolia, though it ended up dropping a $926 million bid for SouthGobi Resources <1878 .hk=""> last year due to political opposition there.
"There's probably been a pullback in looking at Mongolia after that. Everywhere else is still in the game," said PwC's Su, referring to Chinese appetite for coal assets.
RICH PICKINGS
Chinese buyers would prefer to pick up operating mines rather than projects, as that removes the risks of developing a mine from scratch, said Ernst & Young's Elliott.
Operating assets up for sale include a minority stake in Rio Tinto's Coal & Allied assets, potentially worth around $1.7 billion, and Peabody Energy's $500 million Wilkie Creek mine in Australia.
Linc Energy wants to spin off its New Emerald Coal arm, which was recently valued at A$440 million ($400 million), including the mothballed Blair Athol mine.
Several undeveloped projects are on the block, including Brazilian giant Vale's Degulla project in Australia's untapped Galilee Basin and a minority stake in its Belvedere metallurgical project in Australia.
"There definitely is Chinese appetite for coal assets," Andrew Lawson, managing director of Cockatoo Coal Ltd , told Reuters last month after lining up funds from three Asian firms for a coal expansion. "That's the main area we would expect to see demand come from.
(Additional reporting by Ian Ransom; Editing by Muralikumar Anantharaman)
A renewed appetite for acquisitions by the world's biggest coal consumer will be a big boost for miners who are trying to dispose of assets worth billions of dollars to boost shareholder returns.
These include Rio Tinto , which has put Australian and Mozambique coal operations on the block, and Linc Energy , which is selling its New Emerald Coal business.
The Chinese, however, are not rushing to buy. They see asset values coming under further pressure as coal prices remain depressed amid a supply glut that has already driven prices down about a third since 2011.
"We have clients who are interested in taking stakes in coal assets. But the view is the market's not going to get any better for two years. So why buy something today when it's going to be a lot cheaper in eight months' time," said Sam Farrands, a Hong Kong-based partner at law firm Minter Ellison.
Plans to curb air pollution have raised the prospect of a long-term decline in China's need for thermal coal, with Beijing aiming to reduce coal's share of the energy mix to 65 percent or less by 2017 from 73 percent this year.
The lower share, though, will be within an expanding base and it will take a long time to wean China away from coal as it is the cheapest source of fuel for power.
As part of cleaner energy policies announced this week, China will push the use of better quality coal.
This will lead to a split in coal markets, with high-energy coal set to attract a greater premium, which could favour better quality Australian coal, said Michael Elliott, global head of mining and metals at Ernst & Young.
China's thermal coal imports are forecast to rise 17 percent over five years to 281 million tonnes, and metallurgical coal imports by 23 percent to 107 million tonnes in 2018, according to Australia's Bureau of Resources and Energy Economics.
"I don't think (coal use) is going to fall off a cliff. It's not possible yet," said Ken Su, China metals and mining leader at consultants PwC in Beijing.
MONGOLIA OFF-LIMITS
Chinese firms hunting for buys include state-owned enterprises, miners, power firms and traders, targeting thermal coal for power stations and coking coal for steel mills, legal and financial advisers in China and Australia said.
Though they declined to name their clients, state-owned Shenhua Group Corp Ltd has looked at assets in Australia, including Whitehaven Coal and Rio Tinto's stakes in the Clermont Coal mine and Coal & Allied.
Yanzhou Coal Mining Co <600188 .ss=""> has already set the ball rolling, seeking to buy out its Australian unit Yancoal Australia , following a one-third slide in Yancoal's share price this year. The deal, announced in July, still needs Australian government approval.
Aluminum Corp of China (Chalco) <601600 .ss=""> <2600 .hk=""> has long eyed coal assets in Mongolia, though it ended up dropping a $926 million bid for SouthGobi Resources <1878 .hk=""> last year due to political opposition there.
"There's probably been a pullback in looking at Mongolia after that. Everywhere else is still in the game," said PwC's Su, referring to Chinese appetite for coal assets.
RICH PICKINGS
Chinese buyers would prefer to pick up operating mines rather than projects, as that removes the risks of developing a mine from scratch, said Ernst & Young's Elliott.
Operating assets up for sale include a minority stake in Rio Tinto's Coal & Allied assets, potentially worth around $1.7 billion, and Peabody Energy's $500 million Wilkie Creek mine in Australia.
Linc Energy wants to spin off its New Emerald Coal arm, which was recently valued at A$440 million ($400 million), including the mothballed Blair Athol mine.
Several undeveloped projects are on the block, including Brazilian giant Vale's Degulla project in Australia's untapped Galilee Basin and a minority stake in its Belvedere metallurgical project in Australia.
"There definitely is Chinese appetite for coal assets," Andrew Lawson, managing director of Cockatoo Coal Ltd , told Reuters last month after lining up funds from three Asian firms for a coal expansion. "That's the main area we would expect to see demand come from.
(Additional reporting by Ian Ransom; Editing by Muralikumar Anantharaman)
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